The Effect of Dividend Policy on the Value of Firms Listed at the Nairobi Securities Exchange

Abstract

This research paper aimed at evaluating impacts of the dividend policy the value of the firm listed at NSE. The theories that were reviewed to make an explanation of the concepts of the dividends policy in relation with the value of the firm were dividend irrelevance theory by Miller and Modigliani, Bird in hand theory, signalling theory, Agency cost theory and residual dividend theory. The study was necessitated by the research gaps in the theories of dividend and empirical findings on dividend and firm value of listed firms. The financial reports of 2012-2016 were then exploited; the main data collection source was the sample from the total of sixty firms. Quantitative research design was used to evaluate the impact of the policy of dividends on the stock exchange market value.. The research then established that regular dividend policy, residual dividend policy and firm size have a positive significant relation with the firm value. This is because regular and stable dividend policies produces certainty for investors that they get regular income for their investments and also that a company has a benchmark for doing well and also the big companies can be able to accumulate or raise large base of capital at a very low cost as compared to large firms. The study also found that irregular dividend policy, non-dividend policy and investment positively influence the value of the firm but they have no significant effect. This is because investors do not attach much importance to them as their main concern with the dividends that they will be getting. The study also found out that debt ratio, ownership structure and inflation negatively influences the value of the firm. This indicates that investors prefer firms with less debt content in their capital structure since increased use of debt lowers the availability of earnings for shareholders. The study therefore concluded that there is a strong positive correlation between dividend policy and firm value such that an increase in dividends increases the firm value and vice versa. The research makes a recommendation that all managers of the companies that are listed in the NSE should come up with an efficient dividend policy that can enhance the increase in value of the company