MCOM Theses and Dissertations (2010)

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Determinants of dividend policy in listed commercial banks in Kenya
(Strathmore University, 2010-06) Mutiso, Fredrick Mulwa
This study examines the determinants of corporate dividend policy within the listed Commercial Banks in Kenya using a paired approach of statistical analysis and questionnaire survey tool. The study spans the period to 2007 from 1998 using information collected from the financial corporate managers and secondary sources of the listed Commercial Banks. The variables and the predicted associations used in the statistical analysis are derived from the prior literature. Both the regression model output and the respondents supported profitability and liquidity as key determinants of the dividend policy. Debt and investment, even though explicitly supported by the respondents, do not appear as significant from the regression output. Size was ranked as explicitly insignificant or weak by both the respondents and the regression analysis. Dividend policy decisions seem to be supported by clientele effects, signaling, and agency / costs theories. Agency cost theory seems to offer remote support to the pecking order and the bird-in-the-hand theories. However, given that taxation on dividend income is a paltry 5 percent and a final tax, the tax clientele does not seem to contradict investors' desire for regular cash dividends. The study finds no potential justification for the dividend irrelevant theories as the interrelationships between investment, financing and dividend policies find overwhelming support. The study contributes that the empirical findings that profitability and liquidity are significant determinants of dividends, applies to the commercial Banks listed on the NSE as well. Owing to the findings that dividend policy decisions have information content, can affect firm value and in turn or directly affect the wealth of shareholders the dividend policy is worthy every attention by senior management Board.
Determinants of exchange rates and foreign exchange volatility
(2010-07) Karanja, Waiguru
Explaining the movements in the exchange rate is still a puzzle to economists particularly since the break down of the Bretton Wood system in the early 1970's, when many countries introduced a floating system. This paper tries to deepen our understanding of this puzzle by using a model that makes use of data from Singapore, the UK and Kenya. The period covered is January 1993 and December 2008. The variables in the model money supply, current account balance, capital account balance, official reserves balance,interest rate and inflation differential. The dependent variable is exchange rate. The model has purchasing power parity and uncovered interest parity as underlying theoretical assumptions, two main building blocks of open macro economics. A linear regression model was used to analyze the data. In addition Cointergration and Granger-Simms causality tests were used to gain further insights into the research problem. The results show that most of the variables have an inverse relationship with the exchange rate. In emerging and developing countries (Singapore and Kenya) it is the exchange rate which influence the movement of economic fundamentals in question and not the other way round, although interest rate differential constitutes a significant explanatory variable for exchange rate movements in all the three countries included in the model. Both Singapore and the UK have also, in accordance with the RID model, the expected negative sign on the coefficient. The results regarding the other variables are mixed among the countries.
The Determinants of the choice of different accounting methods by companies quoted on the Dar es Salaam stock exchange: Positive accounting theory approach.
(Strathmore University, 2010) Ntui, Ponsian Prot; Dr. Nelson Waweru
This study examines the factors that determine the choice of multiple accounting methods (policies) in Tanzania. The study investigates managers’ decisions to choose accounting methods in a positive accounting theory perspective using panel data on 15 companies listed on the Dar es Salaarn Stock Exchange (DSE) from 2005 to 2008. Data (accounting numbers and accounting policies) were extracted from the companies’ annual reports. Possible determinants of the choice of accounting methods are identified based on the positive accounting theory, including firm size, leverage, effective tax rate, bonus plan, internal financing, corporate governance, bank loans, ownership dilution and labour force. Using regression analysis, the empirical results show that the significant factors are company size, internal financing, corporate governance and labour force. Contrary to the outcome of prior studies, the study finds that company size and internal financing are positively related with income strategy. The study proves statistically that there is a strong association between choice of accounting methods and income strategy. This study makes several contributions to the body of knowledge. First, in the 1’anzanian context, it delennines the factors which affect choice of accounting methods. Second, 16 potential factors are identified from dilTerent studies and 9 tested in one country (Tanzania). Third. the study identifies corporate governance as a new factor impinging on the choice of accounting policies. Fourth, this study shows for the first time that the use of RATIO of income increasing accounting policies to total number of accounting policies can be used as dependent variable. Finally, the study proves statistically the existence of an association between choice of accounting methods and income strategy in Tanzania. The research concludes that there are behavioural differences between managers of developed countries and their counterparts in Tanzania as a developing nation. Economic, social and political differences affect managers’ behaviour in making decisions. Although there are differences between developed and developing countries such as Tanzania, the research finds specific areas of diversion in the choice of accounting methods as company size, bonus plan and internal financing. Future researchers should use cross-sectional data, test foreign political costs, managers’ discretion, audit committee and industry. They should use natural logarithm of total sales as a measure instead of natural logarithm of total assets. Further, they need to investigate relevance of options in choosing accounting policies.
Directors’ remuneration and firm performance in a study of Nairobi Stock Exchange listed companies
(Strathmore University, 2010-12) Injeni, Geoffrey Ikavulu
Under the agency theory, directors who act as agents of shareholders may benefit from the company by awarding themselves high remuneration. To resolve this problem, some authors have recommended corporate governance principles which include a requirement to pay directors based on firm performance. Examples of pay based on firm performance include bonuses and stock options. In Kenya, companies listed on the Nairobi Stock Exchange (NSE) are required to comply with the corporate governance principles issued by the Capital Markets Authority (CMA), which require directors’ remuneration to be based on firm performance. The purpose of the study was to find out first, whether there is a relationship between directors’ remuneration and firm performance for Nairobi Stock Exchange companies, and secondly, the components of executive pay together with the key factors that determine executive pay. A regression analysis involving 37 NSE listed companies covering the period between 2003 and 2008 showed the majority of the companies reported a weak positive relationship between executive remuneration and firm performance (when measured by Revenue Growth, Net Profit Margin, Return on Investment, Return on Equity and Earnings per Share), and a weak negative relationship between executive remuneration and stock market returns (measured by Share Price Growth). In addition, an analysis of 23 respondents from the 37 companies also found salaries, fees and other benefits to be the key components of executive pay. Majority (60%) of the respondents mainly consider experience and qualifications to be the key factors that determine executive pay. The study has confirmed the inconsistency of pay based performance in Kenya. The study has also highlighted the key determinants of directors’ remuneration for companies listed on the NSE. Further studies can be done to establish the challenges of implementing performance based pay in NSE companies. In addition, further research can be done on performance based pay for small and medium sized firms and in the public and private sectors.
An Empirical investigation into the determinants of capital structure of SMEs in Nairobi, Kenya
(Strathmore University, 2010) Macharia, Ishmail Maina; Dr. James Boyd McFie
This study examined whether capital structure theories from the developed world were applicable to Kenyan SMEs given the differences in economic development. The research design was quantitative. Financial data covering a three year period from 2004 to 2006 for forty three SMEs in the trade, hotel, retail and manufacturing sectors, were collected from the 2008 baseline survey by the Kenya Institute for Public Policy, Research and Analysis, KIPPRA. A panel data regression model was used to this data. In addition, a survey was done on the same population in order to triangulate the data from the secondary data analysis to enhance the reliability of the data. The dependent variable was the ratio total liabilities to total assets. Independent variables were size, asset structure and profitability and age with industry, ownership and growth as control variables. Profitability, asset structure and size were found to be key determinants of the capital structure of SMEs. The debt ratio was negatively related to age when turnover measured size but was positively related to age when total assets were used to measure size. The relationship was between the debt ratio and age was not statistically significant at 5% in both cases. The debt ratio was negatively related to size and to profitability but it was positively related to asset structure. This relationship between the debt ratio and size, profitability and asset structure was significant at 5%. Turnover was found to be a more robust measure of size than total assets for the sample in this study while the negative relationship between the debt ratio and profitability concurred with pecking order theory. The significance of asset structure underlined the importance of collateral in SME finance. The questionnaire Survey confirmed that profitability, assets and size were important determinants of capital structure. Profitability was found to be important to the SMEs as it is not an objective measure. The survey also found that while SMEs operated bank accounts, banks were their least preferred source of debt and there was no relationship between capital structure and Asian/African ownership, industry sector and growth.
The Relationship between working capital management and profitability for companies listed on the Nairobi Stock Exchange.
(Strathmore University, 2010) Mathuva, David Mutua; Dr. Ellinami J. Minja
This study examined the effect of working capital management (WCM) practices on company profitability. Using agency, transactions cost and trade-off theories, the study also sought to establish whether the hypothesized relationships between working capital practices and profitability can be defended from both financial and managerial perspectives. Data for this study were collected from the annual financial reports and questionnaires from 30 companies listed on the Nairobi Stock Exchange. The financial data covered a 16- year period (1993 to 2008). The variables of interest included various measures of working capital management, profitability and company characteristics. The financial data were analyzed using pooled ordinary least squares, fixed effects and two-stage least squares estimations. Five regression models were run incorporating each of the key independent variables in each model. Data collected from questionnaires were analyzed using frequency tables. Chi-square tests were also performed on the questionnaire data. Consistent with prior research, this study established that there existed an overall negative relationship between working capital management and profitability. Key findings from the study from both financial and questionnaire data analyses were: (1) a highly significant negative relationship exists between the time it takes companies to collect cash from their customers (accounts collection period) and profitability (p
Stock splits and their effect on share prices : study of firms listed at the Nairobi stock exchange
(2012-02-27) Munyao, John Mwendwa; Dr. Nelson Waweru
The relationship between stock splits and stock prices has been the subject of continuing interest to economists and practitioners. The reaction occurring after the announcement, however, has not been fully understood and explained. Naidu (2008), states that theoretically, a stock split is merely a numerical change, which leaves investors no better or worse off than they were before the split. This implies that there must be some benefit, either real or perceived, that results from a firm splitting its stock. The purpose of this research was to determine whether a stock split announcement had an impact on the related stock price with specific reference to companies listed at the Nairobi Stock Exchange. The specific objectives were to determine motivation behind stock splits within the Kenyan market; and to determine if stock splits have any effect on the share price. Primary and secondary data was used to achieve the research objectives. Primary data was obtained by conducting interviews with key decision makers in companies that had split their stocks and were listed at the Nairobi stock exchange. Secondary data was collected from the database of the Nairobi stock exchange. Analysis was done using Microsoft Excel and SPSS computer programs and output presented using appropriate visual techniques, i.e., tables, graphs and charts. Studies by various scholars like Lyroudi et al (2006) are consistent with findings of this research especially on the trading range hypothesis. Baker & Powell (1993) agree on the reason why stock splits occur. They agree that most splits occur so that shares prices are brought to an optimal range. The study established that most companies undertook stock splits so as to bring the trading range of the share price to an optimum point. This was undertaken so that the majority of investors, both individual and institutional, could have access to the shares of the company. The study further established that other factors such as the split ratio employed, for instance the fact that most companies at the Nairobi stock exchange employed a 10 for 1 ratio could have an effect on the post split share price.

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