Effect of Agency Costs on the Relationship between Dividend Policy and Value of Firms Listed at the Nairobi Securities Excha

Abstract

Dividend policy is considered to be a key decision that influences wealth maximization. There are however, conflicting results on how dividend policy affects firm worth and this debate has been raging over decades. The objective of this paper was therefore, to examine how the link between dividend policy and value of firms listed at the Nairobi Securities Exchange is moderated by liquidity. Balanced panel data was obtained from 52 firms listed at the NSE between 2011 and 2020. Firm value was measured using Tobin's Q (ratio of market value to book value). The proxy for dividend policy was a composite of interim dividend ratio (frequency of dividend payment) and dividend payout ratio (quantum of dividend). Liquidity was measured using operating cash flow ratio. Correlation and general least squares (GLS) fixed-effect model were used to analyze the data. The study established that liquidity moderated the link between dividend policy and corporate value. The study contributes to knowledge by proving that the association between dividend policy and firm value is moderated by liquidity. The findings, thus, imply that managers should pay dividends from the free cash flow to mitigate agency costs. Minimal agency costs enhance firm value.