Effects of Dividend Policy on the Volatility of Share Price of Commercial Banks Listed at Nairobi Securities Exchange

Abstract

The main purpose of the study was to determine the effects of dividend policy on the volatility of share price of commercial banks listed at Nairobi Securities Exchange. The study was informed by signaling theory of dividends, Bird in Hand Theory, Walter‟s Model Water, and tax preference theory. The independent variables of the study were (dividend per share, earning per share, firm size, leverage, inflation and interest rates) while the dependent variable was volatility of share prices. The study adopted a descriptive research design. The population of interest for this study was 11 listed commercial banks in Kenya as at December 2016 and a census was used on all these population. This study was done using secondary data which was extracted from published financial statements of the listed commercial banks. The data collected was in a form that may not be easily consumed or processed unless data cleaning is done. For this study, the researcher made use of Statistical Package for Social Sciences (SPSS) version 23.0 for the analysis. The study applied multivariate regression and correlation analysis in estimating the extent to which share prices changes as a result of changes in the study variables. The study established that, dividend per share DPS had a Pearson correlation of negative 0.148, with p value of 0.012, Earnings per share EPS had Pearson correlation of 0.428 with p value of 0.000; hence EPS had significant effect on volatility of share prices for p=0.000<0.05. Leverage had Pearson correlation of -0.100 with p value of 0.297 and therefore it insignificantly affected volatility of share prices for p=0.297>0.05. Inflation had a Pearson correlation of 0.923 with p value of 0.000; an indication that it was significant in affecting volatility of share prices since p=0.000<0.05. Interest rates had a Pearson correlation of 0.853 with p value of 0.000 an indication it was significant in affecting volatility of share prices as p=000<0.05. The study established that 61.10% of volatility of share prices of commercial banks listed at NSE is explained by the independent variables of the study. The study recommends that commercial banks listed at NSE should strike a balance between the amount of money retained and the one paid to shareholders in form of dividends. Top management and board of directors need to invest in viable projects that earn positive returns and cash inflows so as to enhance their performance and this will strengthen their EPS. It is important for commercial banks to strike a balance between their debts and equities in the capital structure through leverage. Inflation and interest rates need to be kept at sustainable and economical levels through setting up of sound monetary and fiscal policies