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 corporatefinance; however, it still remains a mystery as to whether dividend policyaffects the share prices of quoted firms. During the period under review(2001-2011), share prices of listed firms in the Nairobi Securities Exchangeseverely fluctuated making it difficult for investors to make informedinvestment decisions. The general objective of this study was to investigatethe effect of dividend policy (cash and share dividend) on the stock prices,specifically, the study sought to establish the relationship between cashdividend and the share prices and to determine the relationship between sharedividend and share prices of firms listed at the Nairobi Securities Exchange.The data set consisting of volume weighted average price as dependent variableand cash dividend per share and share dividend per share as independentvariables were collected using data collection schedules for 55 companiessampled for the study. Secondary data was obtained from Nairobi SecuritiesExchange, Capital Market Authorities, Kenya Bureau of Statistics and fromsampled companies for a period between the years 2001 and 2011. Ordinary LeastSquare diagnostic tests were run to ascertain the suitability of the model andthe results showed that the model was suitable for estimation since it did notsuffer from multicollinearity, heteroscedasticity and non-normality problems.Random Generalized Least Square regression analysis was carried out with thehelp of STATA at five percent level of significance. The results of the marketindicated that there was a statistically significant positive relationshipbetween cash dividend and share prices while there was statisticallyinsignificantly negative relationship between share dividend and share prices.This implied that dividend policy affects the share price and that increase incash dividend would result in increase in share price for companies listed atthe Nairobi Securities Exchange, Conversely, an increase in share dividendwould result in an insignificant decrease in share price for companies listedat the Exchange. The results of the study confirmed relevance of dividendpolicy on firm’s value. Based on the findings of the study, it was recommendedthat the management of Capital Markets Authority of Kenya should amend Cap 485ALaws of Kenya and other relevant laws and regulations and ensure enforcement ofthose laws among other measures to guarantee consistent practices by listedfirms that lead to efficiency in the market for the benefit of the investors.Further, the management of listed firms should consider adoption of cashdividend policy more than share dividend as a strategy aimed at increasing thevalue of the firms due to its positive effect on the share price. If this isdone consistently, the shareholders’ wealth would be maximized in the long run.It is thus recommended that further research could be conducted to establishwhether macroeconomic variables affect equity price for firms listed at theExchange. Keywords: Dividend policy, Share price, SecuritiesExchange, investment decisions, stock prices, cash dividend per share and sharedividend per share,