Effect of Dividend Payout Ratio on Value of Insurance Companies Listed at the Nairobi Securities Exchange

Abstract

The dividend decision of a firm has for long been a subject of corporate finance and has always been studied with regard to the financing and investment decisions of the firm. The available theories on dividend policy and firm values have differed and so the debate is still ongoing. The aim of this study was to establish the effect of dividend payout ratio on value of insurance firms listed at the NSE. The population for the study was all 6 insurance firms listed at the NSE. The independent variable for the study was dividend payout ratio as measured by the ratio of dividend per share to earnings per share on an annual basis. The control variables for this study were liquidity as measured by current ratio, leverage as measured by debt ratio and firm age as measured by natural logarithm of the number of years a firm has been in existence. Firm value was the dependent variable and was measured by the ratio of market value of equity to book value of equity. Secondary data was collected over a ten year time frame (January 2008 to December 2017) annually. Descriptive cross-sectional research design was employed for the study and the relationship between variables established using multiple linear regression analysis. Data analysis was undertaken using the SPSS software. The results of the study produced R-square value of 0.358 which means that about 35.8 percent of the variation in value of insurance companies can be explained by the four selected independent variables while 64.2 percent in the variation in value of insurance firms listed at the NSE was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with value of insurance firms (R=0.599). ANOVA results show that the F statistic was significant at 5% level with a p=0.021. Therefore the model was fit to explain the association between the selected variables. The findings also showed that liquidity produced positive and statistically significant values for this study. Dividend payout ratio, leverage and firm age produced statistically insignificant values for this study. This study recommends that listed insurance firms should work on their liquidity positions as liquidity was found to have a significant positive effect on value of insurance firms listed at the NSE.