Ownership Concentration, Capital Structure, Dividend Policy and Stock Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

Ownership concentration enables majority shareholders to influence the capital structure and dividend policies; two key financing decisions that are independently linked to firm performance. Ideally, firm managers should strive to maximize stock returns by selecting an appropriate dividend policy and optimal capital composition that maximize the trade-off between the cost of leverage and gains. However, the performance benefits are not always realized because the controlling shareholders may adversely affect stock returns by extracting private benefits at the expense of the minority shareholders, leading potential investors to consider the firm as a risky and unattractive investment, hence lowering stock demand and price. This research sought to determine the interrelationship among ownership concentration, capital structure, dividend policy and stock returns of companies listed at the Nairobi Securities Exchange (NSE). It seeks to determine whether shareholders with majority shares affect stock performance. In particular, the study examined the effect of ownership concentration on stock returns, the intervening effect of capital structure on the ownership concentration and stock returns relationship, the moderating effect of dividend policy on the ownership concentration and stock returns relationship, and the joint effect of ownership concentration, capital structure and dividend policy on stock returns. The study was anchored on agency theory which explains the interactions among the four research variables by linking the alignment and entrenchment effects on stock performance. Stakeholder, liquidity preference, and trade-off theories were used as support to the agency theory. To test the research hypothesis, the study applied the positivist research philosophy. A census survey was done on sixty-seven firms listed at NSE from 2006 to 2019 and data was obtained from sixty firms that had been listed for at least two years. The study adopted a panel longitudinal research design to analyze the secondary panel data. Descriptive statistics were conducted to assist in identifying relationships among the variables, detect outliers and data visualization. Correlation analysis was done to determine the strength and direction of the relationship between the four variables. Diagnostic tests of multicollinearity, normality, stationarity, serial correlation and heteroskedasticity were undertaken before data analysis to check on the assumptions of the model. The model specification test points out that the fixed effects model was the most applicable for this study. To address the non-normality the data on the four variables were log-transformed. Hypotheses test results found a negative and significant relationship between ownership concentration and stock returns. Secondly, the four-step mediation process showed that capital structure mediated the connection between ownership concentration and stock returns. However, the dividend policy did not moderate the relationship. Finally, the study found that ownership concentration, capital structure and dividend policy jointly affected stock returns. Therefore, the results contribute to the empirical literature by reducing the conflicting positions on the link between ownership concentration and stock returns by introducing capital structure into the relationship and confirming the role of capital structure in performance management. Further, the study has policy implications in that proper degrees of ownership concentration serve as an effective way of eliminating agency conflicts as postulated by agency theory. Thus, the study recommends that listed companies should adopt appropriate levels of ownership concentration and caution corporate managers against high levels of ownership concentration as it may adversely affect stock performance. Further, the study recommends that agents be given incentives through monitoring and regulation to ensure that management interests and those of their principals are aligned when important financing decisions are being made to serve the interests of both majority and minority shareholders. The Study performed a linearity test and found that all the variables were linearly related but did not consider the possibility of other types of relationships, such as curve linear relationships. To determine whether the findings would hold in different contexts, a comparable study may be conducted in other emerging and developed economies.