Effects of dividend policy on share prices: a case of companies in Nairobi securities exchange

Abstract

Dividend policy refers to management's long-term decision on how to deploy cash flows from business activities-that is, how much to invest in the business, and how much to return to shareholders. The study was guided by the following objectives: to identify how clientele effect influence share prices of NSE, to determine how tax incentives influenced share prices of NSE and to identify how free cash flows influenced share prices of NSE. Both Primary data and secondary data were utilized for this study. A questionnaire was used to collect data from the respondents. The questionnaire was divided in to two parts in line with the specific objectives. Secondary data was collected from the websites of the various companies, journals and relevant texts. A pilot study was held one week before the commencement of the study in order to check the efficacy of the questionnaire. Data collected was mainly quantitative in nature and were appropriately analysed using descriptive statistics. The findings were presented using tables and charts, percentages, means and other central tendencies. The study concludes that higher pre-tax risk adjusted returns associated with higher dividend yield stocks to compensate investors for the tax disadvantages of returns affected tax incentives and that investors whose portfolios had low systematic risk preferred high-pay-out stocks. The study also found out that an increase in firms' stocks trading volume affected the share price and investors who wanted current investment income owned shares in high dividend payout firms. The study further concludes that free cash flow caused conflict between management and shareholders which in turn affected the share price and that the executive option plan persuaded management to reduce corporate dividends by an amount that was equal to the option plan. The study recommends that companies consider all pertinent issues before issuing dividends. Since the share market is positively responsive to the dividend announcement, companies should always strive to pay divided consistently for their shares to perform well at the stock exchange. Dividend policy have an effect on the share prices of the firms quoted at NSE thus, companies (firms) should pay dividends to maintain high share pnces.