Abstract:
Dividend payout policy is an important corporate decision that influences investors’
reaction and share prices. Thus, the determinants of firms’ dividend payout policy are
an interesting area that most scholars and academics continue to explore. Although,
indicators of investor pressure can influence dividend payout policies, extant literature
shows mixed findings. Some studies suggest that investor pressure influence CEO
compensation. Other studies indicate that CEO compensation determine dividend
payout policy. Moreover, other studies demonstrate that financial flexibility affects of
dividend payout policy. Therefore, the main purpose of this study was to determine the
mediating effect of CEO compensation on relationship between investor pressure and
dividend payout policy as moderated by financial flexibility. The study was guided by
the following specific objectives; to establish the effect of; foreign institutional
investors and domestic institutional investors on dividend payout policy. The study also
determined the moderating effects of financial flexibility on the relationship between
foreign institutional investors, domestic institutional investors on dividend payout
policy. The study similarly examined whether CEO compensation mediates the
relationship between foreign institutional investors, domestic institutional investors on
dividend payout policy. Also, the study examined the mediating effect of CEO
compensation on the relationship between foreign institutional investors, domestic
institutional investors and dividend payout policy as moderated by financial flexibility.
The study was informed by agency theory, stakeholder theory, signaling theory
information asymmetry theory and theories of executive compensation. A positivism
research paradigm was adopted in the study. This study used a combination of
explanatory and longitudinal research design. The target population comprised of 67
listed firms in Nairobi Securities Exchange (NSE) which have been trading consistently
from 2009-2019. After applying the inclusion/exclusion criteria the final sample
consisted of 40 firms, resulting in a total of 440 firm year observations. The study used
secondary data that was extracted from audited financial statements of individual firms,
and the data was analyzed through descriptive and inferential statistics. The Hausman
test informed the choice between fixed effect and random effect. The study’s findings
show that foreign institutional investors (β=0.597, ρ<0.05) and domestic institutional
investors (β=0.439, ρ<0.05) had a positive and significant effect on the dividend payout
policy. Financial flexibility had a buffering interaction effect on the relationship
between foreign institutional investors (β= -0.10; ρ<0.05), domestic institutional
investors (β= -0.17; ρ<0.05) and dividend payout policy. Further, the study found that
CEO compensation mediated the relationship between foreign institutional investors
(β=0.046, ρ<0.05), domestic institutional investors (β=0.05, ρ<0.05) and dividend
payout policy. Finally, the study found that CEO compensation had a mediating effect
on the relationship between foreign institutional investors (index for moderated
mediation 0.298, ρ<0.05), domestic institutional investors (index for moderated
mediation 0.149, ρ<0.05) and dividend payout policy as moderated by financial
flexibility. Therefore, the study concludes that the CEO compensation mediates the
relationship between investor pressure and dividend payout policy as moderated by
financial flexibility. The study recommends that regulators create a conducive
environment for institutional investors. Furthermore, managers may be informed on
how to balance the association between financial flexibility and dividend payout policy
in light of institutional pressure. Finally, policy makers may be informed on the
importance of how CEO compensation influences the relationship between investors
and dividend payout policy.