ABSTRACT
The study was set out to establish the relationship between working capital management and dividend payout ratio of listed firms in Nairobi securities exchange (NSE). Several studies in Kenya have explored on working capital management and profitability. No studies have been done on working capital and dividend payout ratio with specific reference to listed firms in Kenya. The objectives of the study were; to determine the relationship between accounts receivables collection period and dividend payout ratio, to establish the relationship between inventory conversion period and dividend payout ratio, to evaluate the relationship between accounts payable period and dividend payout ratio and to examine the relationship between cash conversion cycle and dividend payout ratio. A correlation research design was utilized and the target population was 62 firms listed in Nairobi securities exchange for a period of eight years from (2006-2013). Purposive sampling method was used to systematically select 34 companies. Data collection sheet was used to collect secondary data from published annual reports and financial statements covering the years 2006-2013. Data collected was analyzed using a multiple regression model and Pearson correlation analysis was carried out to determine the relationship between working capital management and dividend payout ratio. Similarly, ANOVA test and independent t-test was used at 95% degree of confidence to determine the level of significance. The data analyzed was summarized and presented using tables for easy interpretation, understanding, reading and discussion. Findings of the study indicated that efficient management of working capital leads to better dividend payout ratio. A negative relationship existed between accounts receivables collection period (-0.079) with dividend payout ratio. Similarly inventory conversion period revealed a negative relationship of (- 0.073). Furthermore average payment period revealed a positive relationship of 0.089 with dividend payout ratio. Finally cash conversion cycle indicated a positive relationship of 0.022. The conclusion of the study was that there is a weak positive relationship between working capital management and dividend payout ratio of listed firms in Kenya (r=0.293) however the level of significance was (p=0.000) indicating that there is no relationship between working capital management and dividend payout ratio of listed firms in Kenya. It was recommended that managers of listed companies should increase dividend payments by reducing number of receivable days, decreasing inventory conversion period at reasonable, delaying payments to suppliers and reduction of cash conversion cycle to its minimum and lenders can improve dividend payout ratio by coming up with broad scope of working capital management components.
CHAPTER ONE
INTRODUCTION
Background of the Study
The theory of dividend policy is one of the most important theories in finance because it is directly related to shareholders. However, dividend policy is one of the unresolved issues in finance theory. Indeed, there exists no definite explanation on how firms determine their dividend policy (Wanjiku, 2013). In this connection, dividend policy decision is one of the four decisions of financial management because it affects the financial structure, the flow of funds, corporate liquidity and investors’ attitudes (Bijendra, 2009). For instance, dividend decisions are important because they determine what funds flow to investors and what funds are retained by the firm for investment. In this regard, managers have to decide whether to pay dividend or not and if they decide to pay dividend, they will face a further question of how much they should pay. Therefore, dividend policy is intended to regulate and guide a firm’s management when issuing dividends to shareholders (Wanjiku, 2013).
Dividends are the returns that accrue to shareholders as a result of the money invested in acquiring stocks of a given company. Thus, in maximizing shareholders wealth, both investment decisions and dividend decisions should be given serious attentions simultaneously (Oladipupo and Ibadin 2013). As a consequence, dividend paid has an effect on the liquidity and profitability position of a firm. Additionally, when a firm issues dividends it reduces the amount of liquid cash that can be used to meet the demands of short time creditors and lenders. As a result, it can have an impact on the survival of a firm forcing the firm to an insolvency situation (Pandey, 2010).
Similarly, Hashemijoo et. al (2012) points out that, in corporate finance, one of the most important decisions is concerned with the answering the question, should the profits of firm be distributed to the shareholders as dividend or must it be reinvested in new opportunities and if it must be distributed, what proportion of profit must be paid to shareholder and what proportion must be returned to the business? Thus, for answering this question, managers must consider which dividend policy will lead to maximization of shareholder’s wealth.
Subsequently, Mohammad (2013) points out that the best dividend policy is the one that maximizes the company’s stock price which leads to maximization of shareholders wealth and also ensures more quick economic growth. Likewise, management’s primary goal is shareholders wealth maximization and this can be achieved by giving the shareholders payment on their investments. This implies that the objective of the finance manager should be to find out an optimal dividend policy that will enhance value of the firm.
Liquidity management is a critical component of every organization. More so the firms listed at the NSE market. This is due to the fact that there is more scrutiny of the financial statements of the listed firms. The aspect of liquidity management becomes very crucial for a firm when deciding on its dividend payout. Firms’ earnings provide a firm with relevant cash flow to maintain its liquidity position. Hence afirms management will need to consider the level of earnings to issue out dividends (Wanjiku, 2013)
In this regard, working capital management becomes very important for the success of a business because of its effect on firm’s profitability as well on liquidity. Working capital management refers to investment in current assets and current liabilities which are liquidated within one year or less and is therefore crucial for firm’s day-to-day operations (Kesimli and Gunay, 2011).
Van Horne and Wachowicz (2004) affirms that excessive levels of current assets may have a negative effect on the firm’s profitability whereas a low level of current assets may lead to lower level of liquidity and stock outs resulting in difficulties in maintaining smooth operations. Therefore this study was set out to assess the relationship between working capital management and dividend payout ratio of firms listed in Nairobi securities exchange.
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Item Type: Kenyan Topic | Size: 54 pages | Chapters: 1-5
Format: MS Word | Delivery: Within 30Mins.
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