Effect of Dividend Policy on Value of Firms Listed at the Nairobi Securities Exchange

Abstract

Dividend policy is believed to be a key decision that influences firm value. However, there are conflicting findings on how dividend policy affects firm value and the topic has remained debatable over several decades. The objective of this study was to investigate the interrelationship between dividend policy and value of firms listed at the Nairobi Securities Exchange. To test the hypothesis, balanced panel data was obtained from 52 firms listed at the NSE between 2011 and 2020. Firm value was measured using Tobin’s Q (ratio of market value to book value). Dividend policy was measured by a composite of interim dividend ratio (frequency of dividend payment) and dividend pay-out ratio (quantum of dividend). Correlation and general least squares (GLS) fixed-effect model were used to analyse the data. The findings reveal that there is a direct link between dividend policy and firm value. This study concluded that dividend policy affects company worth. The study findings provide valuable ruling on the debate about the impact of dividend policy on firm value. The findings, thus, advocate for payment of dividends to grow firm value. Managers should therefore, focus on crafting of dividend policies that enhance firm value.

Keywords: Dividend Policy, Dividend Relevance, Dividend Irrelevance