The Effect of Earnings and Dividends on Share Prices of Firms Listed at the Nairobi Securities Exchange

Abstract

Firms quoted on the NSE usually declare their dividends and shareholders on the firm’s share register as at a given cut-off date become eligible to receive a dividend once it is paid out. Once a dividend is declared, the stock prices commence trading cum-dividend until the dividend payment is made to shareholders. Shares trading cum dividend tend to sell at higher prices as they are expected to factor the proposed dividend component. This study was guided by efficient market hypothesis and random walk theory and signaling supposition theories. The study sought to examine the influences of incomes and dividends on stock prices of corporations registered under the NSE. The study employed descriptive research design. The populace of the research included all firms listed at the Nairobi Securities Exchange. The people of all the listed corporations as at December 31, 2015, stood at 61. The study utilized secondary data. Data including share prices of stocks was gathered from the Nairobi Securities Exchange (NSE). The data analysis involved correlation analysis using a multiple linear regression model. Data analysis was carried out using computer software, SPSS, to run the regression model. The study further concludes that earnings and dividends affect the value of shares of a firm in the long run and that the association is significant and constructive. Therefore, it is a depiction that earnings and dividend policy are pertinent and impact the share price of a corporation hence its worth incomparable to the hypotheses that view dividend policy as extraneous. The study recommends that Investors’ who invest in stocks for short term or long term purposes need to take into account EPS and DPS ratios when investing in shares. This is because a higher EPS and DPS ratios leads to a higher share price. Therefore, investors should include counters with high EPS and DPS ratios in their portfolios. Such a portfolio would increase the value of the investor’s wealth. In addition, investors should take into account previous EPS and DPS ratios when structuring their portfolio. Companies who need to show an increase in share price are also advised to declare high dividends and earnings for any given level of earnings. Such an action will be interpreted positively by investors and this will boost demand for the shares. Hence share prices will rise