Effects of dividend policy on share prices: a case of companies in Nairobi securities exchange
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Date
2014-07-08
Authors
Milai, Benson
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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.
Description
Department of Business Administration, 48p. 2013