Effects of Dividend Policy on share price of firms listed at the Nairobi Securities Exchange, Kenya
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Date
2016
Authors
Kibet, T.W.
Jagongo, A. O.
Ndede, F.W. S
Journal Title
Journal ISSN
Volume Title
Publisher
IISTE
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 were collected using data collection schedules for 55 companies sampled for the study. Secondary data
was obtained from Nairobi Securities Exchange, Capital Market Authorities, Kenya Bureau of Statistics and
from sampled companies 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 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 adoption of cash
dividend policy more than share dividend as a strategy aimed at increasing the value of the firms due to its
positive effect on the share price. 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.
Keywords: Dividend policy, Share price, Securities Exchange, investment decisions, stock prices, cash dividend
per share and share dividend per share,
Description
Research Article
Keywords
Dividend policy, Share price, Securities Exchange, Investment decisions, Stock prices, Cash dividend per share, Share dividend per share
Citation
Research Journal of Finance and Accounting Vol.7, No.8, 2016