Relationship between dividend policies and share prices for companies quoted at the Nairobi Stock Exchange

Abstract

The effect of a firm's dividend policy on the current price of its shares is a matter of considerable importance. The expected relationship between dividend policy and share prices is that stable dividend payout will increase share prices and vice versa. However, dividend irrelevant theorists argue that dividend policy of a firm is irrelevant because it has no effect on either the price of the firm's stock or its cost of capital. This study aimed at determining the relationship between dividend policy and share prices for companies quoted at the NSE

This study used a causal research design. The target population of this study was all the firms 47 quoted at the Nairobi Stock Exchange (N.S.E). There are 47 listed firms at the Nairobi stock exchange. The study was a census survey. The stock prices of the listed firms in the Nairobi Stock Exchange are normally in the public domain and thus data was obtained from NSE. Primary data was collected by use of a semi-structured questionnaire to establish the type of dividend policy firms in NSE employ. This study therefore recommends that firms listed in Nairobi stock exchange should employ a policy of paying constant amount per share e.g. Kshs. 2 per share.

This study revealed that paying constant amount per share was the most suitable of all the four firm policies analyzed. To the government of Kenya this study recommends that it should form policies that to protect shareholders from exploitation by firms management. If a firm was to use a constant payout ratio policy it would create uncertainty to ordinary shareholders especially those who rely on dividend income and they might demand a higher required rate of return.

To the investor this study recommends that they should invest in the firms that pay constant amount per share plus extra amount depending on profitability. Constant amount per share plus extra gives the firm flexibility to increase dividends when earnings are high and participate in supernormal earnings. It assures the investor of a constant amount per share and extra if there happens to a profit in the company