Effects Of Dividend Policy On Share Price Of Firms Listed At The Nairobi Securities Exchange, Kenya

ABSTRACT

Dividend policy is a widely researched topic in the field of corporate finance; however, it still remains a mystery as to whether dividend policy affects the share prices of quoted firms. During the period under review (2001-2011), share prices of listed firms in the Nairobi Securities Exchange severely fluctuated making it difficult for investors to make informed investment decisions. The general objective of this study was to investigate the effect of dividend policy (cash and share dividend) on the stock prices, specifically, the study sought to establish the relationship between cash dividend and the share prices and to determine the relationship between share dividend and share prices of firms listed at the Nairobi Securities Exchange. The data set consisting of volume weighted average price as dependent variable and cash dividend per share and share dividend per share as independent variables and net assets per share, retained earnings per share, debt equity ratio and earnings per share as control variables were collected using data collection schedules for 55 companies sampled for the study. Secondary data was obtained from Nairobi Securities Exchange, Capital Market Authorities and individual company’s websites for a period between the years 2001 and 2011. Ordinary Least Square diagnostic tests were run to ascertain the suitability of the model and the results showed that the model was suitable for estimation since it did not suffer from multicollinearity, heteroscedasticity and non-normality problems. Random Generalized Least Square regression analysis was carried out with the help of STATA for the whole market and for the 10 economic sectors represented at the Nairobi Securities Exchange at five percent level of significance. The results of the market indicated that there was a statistically significant positive relationship between cash dividend and share prices while there was statistically insignificantly negative relationship between share dividend and share prices. This implied that dividend policy affects the share price and that increase in cash dividend would result in increase in share price for companies listed at the Nairobi Securities Exchange, Conversely, an increase in share dividend would result in an insignificant decrease in share price for companies listed at the Exchange. The results of the study confirmed relevance of dividend policy on firm’s value. Based on the findings of the study, it was recommended that the management of Capital Markets Authority of Kenya should amend Cap 485A Laws of Kenya and other relevant laws and regulations and ensure enforcement of those laws among other measures to guarantee consistent practices by listed firms that lead to efficiency in the market for the benefit of the investors. Further, the management of listed firms should consider cash dividend policy more than share dividend due to it positive effect on the share price as a strategy of increasing the value of the firms. If this is done consistently, the shareholders’ wealth would be maximized in the long run. It is thus recommended that further research could be conducted to establish whether macroeconomic variables affect equity price for firms listed at the Exchange.