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

Abstract

Dividend payment is a contentious issue in finance. Various theories have come up trying to identify the determinants of dividend payout, more so the percentage of earning that should be paid as dividend and it is effect on firm value. Notwithstanding the numerous theories and models developed to clarify the relationship between these two variables, the relationship remains a puzzle. The aim of this study was to ascertain 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 capital structure as measured by debt ratio, liquidity as measured by current ratio and firm size as measured by natural logarithm of total assets. 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 0.513 which means that about 51.3 percent of the variation in value of insurance companies can be explained by the four selected independent variables while 48.7 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 operational efficiency of public universities in Kenya (R=0.716). ANOVA results show that the F statistic was significant at 5% level with a p=0.001. Therefore the model was fit to explain the association between the selected variables. The findings also showed that firm size and liquidity produced positive and statistically significant values for this study. Dividend payout ratio and capital structure produced statistically insignificant values for this study. This study recommends that should work towards improving their asset base and liquidity as these two were found to have a significant positive effect on value of insurance firms listed at the NSE.