Board Structure, Chief Executive Officer Entrenchment And Dividend Payout Among Selected Listed Companies In East Africa

Abstract

Dividend pay-out is widely studied in finance literature. Indeed, the decision on dividend payment rests with a company’s board of directors and the power of the Chief Executive Officer (CEO). Dividend pay-out differ from one firm to another with wider variations seen in emerging economies where there are weaker rules and regulations. This study assessed the role of the board of directors and the CEOs in determining dividend pay-out. The general objective was to investigate the relationship between board structure and dividend pay-out and the moderating role of CEO entrenchment. The specific objectives were to determine the effect of CEO duality, board size, board tenure, non executive director on dividend pay-out. Further the study sought to establish the interaction effect of CEO entrenchment on dividend payout. The study was grounded by the agency theory, stewardship theory, upper echelons theory and the theory associated with dividend payout namely signaling theory to determine the relevance of dividend payout in East African countries. The study used exploratory research design. The study used panel data for a period of nine years from 2005 to 2013. Data was collected from all firms listed in the stock markets of Kenya, Uganda, Tanzania and Rwanda. The study used random effect regression model to analyze the data. The findings showed that board size (β= 2.780, p=0.000) and CEO duality (β=36.219, p=0.001) has positive and significant effect on dividend pay-out, non-executive director and board tenure has a negative and significant effect on dividend payout (β= -46.120, p=0.000) and (β= -0.786, p=0.009). Furthermore, CEO entrenchment was found to moderate the relationship between board structure and dividend payout, such that board tenure was found to have enhancing and significant interaction on dividend payout(β=0.105, p=0.000) and CEO duality (β=4.873, p=0.000). Furthermore, CEO entrenchment does not moderate the relationship between board size, non executive director and dividend payout. From the findings of this study, effective monitoring of business is more crucial to reduce CEO entrenchment effect and agency cost. This will provide good signaling effect to the market price following the increases of earnings and thereafter dividend payout. It was also noted that as long as small board size are effective in decision making toward dividend payout, CEO entrenchment stewards the small board through increases of allowances or rewards to reduce or evade the dividend payout. This study recommends that younger stock market like Rwanda, Uganda and Tanzania to incorporate more local firms while strengthening dividend policy. It it therefore suggest to reinforce policies of the countries on selecting board members whereas the diversity and experimentation of non executive directors should behold. This study contributes to theory by linking upper echelons theory, Stewardship theory and signaling theory in relation to CEO entrenchment. The regulators would find this study useful in terms of developing a balance between the board of directors and set clear regulation on the interaction between non executive director and the use of board committees toward safeguard shareholder interest among other dividend payout.