EFFECT OF DIVIDEND POLICY ON MARKET VALUE OF FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE

Abstract

Companies listed at the Nairobi securities exchange usually record different market values in each financial year because of various decisions made on investment, financing, or dividend payout. Dividend policies may impact share price positively or negatively depending on the firm’s management decisions; consequently, the top management of a firm may find it hard to come up with ideal dividend policy which suits their firm at any given financial year. Several scholars have put across different theories to explain dividend behaviour of various markets and firms. This study investigated the effect of dividend policy on market value of firms listed at the Nairobi Securities Exchange. Secondary data was collected from 38 firms purposively selected from the year 2006 to 2015. The data was investigated and analyzed using descriptive and inferential statistics at the 0.05 level of significance so as to understand role of dividend policy in a firm’s market value. Effect of stable, constant and irregular or residual dividend policies were investigated through the use of ANOVA and regression analysis to gain insight into their importance as value enhancing tools. Among the key findings of the study was that dividend policies have a positive significant effect (R2= 0.655) on market value of the firms listed at the Nairobi Securities Exchange. Regression analysis outcome indicated that by shifting payout policy from irregular towards stable policy the firm’s value improved by 0.748 and the difference between the policies is statistically significant at the 0.002 level of significance. In addition, dividend stability was preferred by investors in the market since the market value of companies paying stable dividends was 61.65 followed by those paying constant dividends at 46.20 and lastly irregular dividends at 42.65. Firm size was irrelevant in the dividend decisions made by firms in the market. Since dividend payment enhanced the value of the firm, the study recommends that investors should consider dividend paying companies when making investment decisions. Further, dividend payout should not vary widely on a year to year basis since stability was what investors were keen on. These results mean that dividends convey important information to investors about a firm’s financial prospects and future profitability especially when asymmetric information characterizes the market. In this respect, the study contributes to the debate on dividends’ role in market value addition and shows how investors should view dividend payout at the Nairobi Securities Exchange.