Effect of Dividend Decisions on Financial Performance of Listed Financial Institutions in Kenya

Abstract

Investors invest in shares with the aim of earning dividend income or capital gain. The amount of dividend paid to the investors depends on the company’s dividend policy. Dividend policy is the determination of which portion of cash earnings should be retained in the firm for reinvestment and which funds are paid out to investors from either current or accumulated retained earnings. The objective of this study was to examine the relationship between dividend decisions and financial performance of listed financial institution in Kenya. Several theories were developed to explain the dividend policy puzzle. These included modigliani-miller dividend irrelevance theory, signaling theory, and bird in the hand theory. Descriptive research design fit the proposed study which aimed to determine the relationships between variables that is dividend decision making and financial performance. The target population in this study was all the 15 financial institutions listed in The Nairobi Stock as at 31st December 2015. (As per Appendix I) Since there are only 15 listed Financial Institutions in The NSE as at December 2015, all companies which were actively trading between 2011 and 2015 were studied. The study used secondary data. Audited financial reports of the 15 firms for the period 2011 to 2015 were obtained from the NSE. From the financial statements, the information to be collected included the net income levels for each of the firms to calculate the financial performance (dependent variable), dividends paid, total assets, total debt ( both short term and long term) and total equity of the firm to calculate the independent variables. The five year period was deemed long enough to address any events which could affect the trends and relationships in a particular year. Regression analysis was performed on the data to test any effect of dividend decision (independent variable) on a firm’s financial performance (Dependent variable). F-test was used to test the joint significance of all coefficients and t-test for the test significance of individual coefficients. The significance of the regression model was determined at 95% confidence interval and 5% level of significance. from the study that dividend policy has an affirmative impact on listed financial institutions performance. There is no gainsaying the fact that strict attention paid to dividend policy by financial institutions would lead to a better performance results. Therefore the management needs to craft an ideal dividend policy that would appeal to stockholders the most as a way of returning value to them by virtue of their sacrifices made. This is because the payment of dividend and the payout ratio conveys to shareholders how that the company is profitable and financially strong. Dividend policy can affect the value of the firm and in turn, the wealth of shareholders. Dividend payout ratio can predict future earnings and hence be used to determine financial performance.