Investor pressure, CEO compensation and financial flexibility on dividend payout policy among listed firms in Nairobi securities exchange, Kenya.

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.