Effects of dividend policy on share prices: A case of companies in Nairobi Securities Exchange

Waithaka SM, Ngugi JK, Kirago P. "Effects of dividend policy on share prices: A case of companies in Nairobi Securities Exchange." Prime Journal of Business Administration and Management (BAM). 2012;2(8):642-648.


Dividend policy refers to management’s long-term decision on how to deploy cash flows from business activities-that is, how much to invest in the business, and how much to return to shareholders. The determination of the amount of dividends payable is an important decision that companies undertake since the objective of the firm is to maximize the shareholders’ wealth as measured by the price of the company’s common stock. The study concluded that higher pre-tax risk adjusted returns associated with higher dividend yield stocks to compensate investors for the tax
disadvantages of returns affected tax incentives and that investors whose portfolios had low systematic risk
preferred high-pay-out stocks. This was consistent with Brennan’s model (Brennan, 1970).The study also found out
that an increase in firms’ stocks trading volume affected the share price and investors who wanted current
investment income owned shares in high dividend payout firms and this was consistent with the findings of Botha (1985). The study further concludes that free cash flow caused conflict between management and shareholders which in turn affected the share price and that the executive option plan persuaded management to reduce corporate dividends by an amount that was equal to the option plan. This was consistence with the findings of Lambert, Lanen and Larker (1989). The study recommends that companies consider all pertinent issues before issuing dividends.Since the share market is positively responsive to the dividend announcement, companies should always strive to pay divided consistently for their shares to perform well at the stock exchange. Dividend policy have an effect on the share prices of the firms quoted at NSE thus, companies (firms) should pay dividends to maintain high share prices.

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