Determinants of Share Holders’ Wealth among Listed ...

International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online) Vol. 4, Issue 2, pp: (374-388), Month: October 2016 - March 2017, Available at: www.researchpublish.com

Page | 374 Research Publish Journals

Determinants of Share Holders’ Wealth among

Listed Financial Firms’ on the Nairobi

Securities Exchange

1Imukuny Geoffrey,

2Dr Mutua Mbithi,

3Maniagi Musiega

1College of Human Resource and Development, Jomo Kenyatta University of Agriculture and Technology P. O. Box

62000, 00200 Nairobi, Kenya

Abstract: Corporate dividend payout policy has been an issue of interest in the financial literature for a long time.

Despite the vast research on the topic, it remains debatable. For this reason, dividend policy has become one of the

most debated topics in corporate finance and among many academics. Over forty years have been spent

researching dividend policy, and thus far, it has not been resolved. Several theories have been proposed to explain

the relevance of dividend policy and whether it affects shareholders wealth, but there has not been a universal

agreement. It is because of this that the current study sought to investigate the determinants of share holders’

wealth among listed financial firms’ on the Nairobi Securities Exchange. The study specifically investigated the

effect of dividend payout, leverage and growth on shareholders wealth. The study also investigated the effect of

firm size as a control variable on shareholders wealth. The study was hinged on the Dividend relevance theory, and

the signaling effect of dividend. The study adopted descriptive survey research design. Data was analyzed using

SPSS version 22. The study sought to establish the effect of dividend payout on share holders’ wealth among listed

financial firms’ on the Nairobi Securities Exchange. The study concludes that shareholders wealth measured as

market price per share is positively and insignificantly associated with the amounts of dividends paid by the firms.

The amount of dividends paid is also positively and insignificantly related to shareholders wealth. The study also

sought to determine the effect of leverage on share holders’ wealth among listed financial firms on the Nairobi

Securities Exchange. The study concludes that Leverage is negatively and insignificantly associated with

shareholders wealth. Leverage is also negatively and significantly related to shareholders wealth. The study sought

to determine the effect of growth on shareholder’s wealth among listed financial firms’ on the Nairobi Securities

Exchange. The study concludes that growth of the firm is positively and significantly associated with shareholders

wealth. Furthermore, growth is positively and insignificantly related to shareholders wealth. The study also sought

to find out the effect of firm size as a control variable on share holders’ wealth among financial firms’ listed on the

Nairobi Securities Exchange. The study findings led to the conclusion that firm size is positively and significantly

associated with the shareholders wealth. Firm size also controls the relationship between shareholders wealth and

dividend. Following the findings and conclusions, the study recommends that both current and potential investors

who are predicting future shareholders wealth in a firm should take note of the firm’s financial leverage and size.

They should expect higher shareholders wealth (Market price of the share) among firms with high assets as well as

firms with low leverage ratio. Another recommendation made by the study is that managers should incorporate

policies to pay low amounts of dividends when their firms have high leverage. This will in turn lead to an

improvement in the shareholders wealth. The study also recommended that the government should make policies

that encourage dividend payout when there is a need to raise more revenue from dividend withholding tax.

Keywords: Financial Literature, SPSS, Market price of the share.



1. INTRODUCTION

1.1 Background to the Study:

One of the vital components of corporate policy is distribution of earnings. The dividend policy of a company determines

the division of earnings between payments to stockholders and reinvestments in the firm (Mutie, 2011). Finance

manager’s task is to allocate the earnings to dividends or retained earnings. Retained earnings are one of the most

significant sources of funds for financing corporate growth. The latter makes it eventually possible to get more

dividends.The topic of dividend payout has been of concern to financial managers and every firm at large (Sarwar, 2013).

Firms face the dilemma of sharing dividend to stockholders and retaining their earnings with the aim of reinvesting it back

into the business to enhance further growth. The decision of any firm regarding how much earnings they could pay out as

a dividend and how much they could retain is the concern of dividend payout decisions (Sarwar, 2013).

Dividend payment pattern impact among other things company’s stock price and reputation that is, paying out more cash

dividends tends to increase the price of the stock (Malik, Gul & Rehma, 2013). However, according to Masum (2014),

increasing cash dividends means that less money is available for reinvestment and reinvesting back fewer earnings into

the business will lower the expected growth rate and invariably depress the price of the stock hence the firm should be

very careful in deciding the allocation of earning to these two objectives.

Kenyoru, Kundu and Kibiwott (2013) argue that managers must consider which dividend policy will lead to maximization

of shareholders wealth or stocks price, a divided policy that maximizes the company’s stock prices leads to maximization

of shareholders wealth and also leads to quick economic recovery hence preferable. Managers can create wealth by

distributing cash flows generated by successful trading between dividend payments and retentions within the company

(Kenyoru, Kundu & Kibiwott, 2013).

This study aims to explore how far dividend payment will affect firms’ share holders’ wealth with special reference to

Nairobi Securities Exchange market. Persistent crash in the market price of shares is a major concern to investors and

financial analysts all over the country and the world in general. If the intent of the manager is to maximize the value of the

firm, then investors should prefer that the firm pay dividend only if acceptable capital budgeting opportunities do exist

(Besley & Brigham, 2010). Fumey and Doku (2013) state that dividend payout refers to the proportion of total profit paid

out to ordinary shareholders as dividends. Large dividend payout in a period would reduce funds available for investment

in subsequent periods and that would lead to the tendency of raising equity or debt in the next period to finance

investment. On the other hand, large investment outlay would lead to a reduction in available funds to finance dividend

payout and increase the need for external debt financing during the next period to finance dividend payment. A reduction

in dividends paid is looked at poorly by investors and the stock price usually depreciates as investors seek other dividend

paying stocks (Fumey & Doku, 2013).

In China, cash dividends are immediately taxable to shareholders as income, while stock dividends are not taxed. In the

absence of cash dividend payments, shareholders must sell shares to extract their ratable portion of accumulated firm

wealth in the form of capital gains; moreover, there is no capital gains tax in China. Therefore, stock dividends may

provide a convenient vehicle for managing capital gains extraction for individual shareholders (Wang, Manry & Wandler,

2011). These authors note that the State controls two-thirds of the firms in China and has the ability to determine the

dividend policy of those firms it controls. With this ability, an agency conflict arises in that the State has an incentive to

increase the cash flow it receives from shareholder taxes by causing firms to pay cash dividends rather than stock

dividends

Most firms quoted on the Nigerian Stock Exchange have clearly defined dividend policies that are based on the general

dividend practice in the industry (Adediran & Alade, 2013). In Kenya shareholders cannot increase the amount of

dividend declared by directors but have power to reduce. Profits made by corporation can either be re-invested or be

distributed as dividend to stockholders. Each company formulates its own policies as regards dividend. This mostly is

determined by many factors and conditions prevailing during that period. Many corporations retain part of their earnings

for capitalization purpose while pay the remainder as dividend (Musiega, Alala, Musiega, Maokomba & Egesa, 2013).

Among the requirements for companies that want to be listed in the Nairobi Securities Exchange must fulfill, is that they

should have a clear future dividend policy.



1.2 Statement of the Problem:

Corporate dividend payout policy has been an issue of interest in the financial literature for a long time. Additionally,

despite the vast research on the topic, it remains an open subject (Brealey, 2012). Miller & Modigliani stipulates that

dividend policies are all equivalent and that there is no particular policy that can increase shareholders’ wealth in perfect

capital markets.For this reason, dividend policy has become one of the most debated topics in corporate finance and

among many academics. studies in the past tried to find the missing pieces in the dividend puzzle for more than a half-

century (Al-Malkawi, Rafferty & Pillai, 2010).

According to Mirza and Azfa (2010), forty years have been spent researching dividend policy, and thus far, it has not been

resolved. This is evident in a study by Yegon, Cheruiyot and Sang (2014) who recommended that firms should ensure that

they have a good and robust dividend policy in place to enhance good performance and attract investors contrary to Agyei

and Marfo-Yiadom’s (2011) studies on the effect of dividend policy on stock prices that explained that dividend policy

does not affect the stock prices. The duo argue that it depends on the investors’ decision to keep either high or low

yielding securities; return earned by them in both cases remains the same. However the return earned cannot be the same.

Locally, Gitau (2011) studied relationship between dividend payment and firm value found a weak positive relationship

between dividend payout ratio and share prices for companies listed on the NSE while Marekia (2015) carried out a

similar study on dividend policy and the value of the firm for companies listed on NSE and found that there was a

significant relationship between dividend payout ratio and the value of the firm though the former looked at all companies

listed at the NSE.

In some scenarios some of the companies that recorded the greatest successes during the last years like Apple and Google

chose not to pay dividends (Elgammal, 2014). A close observation of largest quoted companies in united Kingdom show

that they have a trend of not paying dividends (Smith, 2012). Several theories have been proposed to explain the relevance

of dividend policy and whether it affects shareholders wealth, but there has not been a universal agreement (Masara,

2015). This study would therefore add more knowledge to this research area.

According to Shisia, Marangu and Omwario (2014) further studies which should include other factors affecting dividend

policy besides dividend payout is recommended to determine firms performance. Similarly Kai, Shyuan,Yer, Yee and Lly

(2014) recommended that the period of study be extended besides including other variables. They also state studies to be

done in different countries and different categories of companies. This is why this study targeted other factors as firm size,

growth and leverage besides payout for a longer period.

1.3 Objectives of the Study:

1.3.1 General Objective:

To establish the determinants of share holders’ wealth among listed financial firms’ on the Nairobi Securities Exchange.

1.3.2 Specific Objectives:

1. To establish the effect of dividend payout on share holders’ wealth among listed financial firms’ on the Nairobi

Securities Exchange.

2. To determine the effect of leverage on share holders’ wealth among listed financial firms on the Nairobi Securities

Exchange.

3. To determine the effect of growth on share holders wealth among listed financial firms’ on the Nairobi Securities

Exchange.

To determine the effect of firm size as a control variable on share holders’ wealth among financial firms’ listed on the

Nairobi Securities Exchange

2. LITERATURE REVIEW

2.1 Theoretical Review:

Theoretical literature review helps establish what theories already exist, the relationship between them, what degree the

existing theories have been investigated and do develop new hypothesis to be tested, with an aim of establishing the

appropriateness or inadequacies of such theories to research problems. A literature review is an evaluative report of

studies found in the literature related to your selected area; it should describe, summarize, evaluate and clarify (Shisia,

Marangu & Omwario, 2014).



2.1.1 Dividend Relevance Theories:

This school of thought considers dividend to be active variable affecting the value of the firm (Lintner, 1956; Gordon,

1959; Walter, 1963). The dividend relevance theory relaxes the assumptions of perfect capital markets and rational

investors. It analyses empirically the behavior patterns of dividend distributions and their effect on the value of the firm.

In real world, market frictions are not costless and investors do not always act rationally (Lease, John, Kalay,

Loewenstein & Sarig, 2000).

Gordon (1959) in his ―bird in hand‖ theory contends that dividend policy affects the value of the firm. He argues that high

dividend payout is important for investors because dividend provides certainty about the company’s finance well being

and is also attractive for investors looking to secure current income. According to him, the market value of a share is also

attractive for investors looking to secure current income. Walter (1963) argues that the choice of dividend policies almost

always affect the value of the firm because if a firm has abundance of profitable investment opportunities, there should be

no cash dividend for earnings is the source of funds in such case.

Many researchers support dividend relevance theory, they say dividend policy affects the firms value and market price of

shares hence shareholders wealth. Joshi (2011) examined the impact of dividend on stock prices in Nepal with the aim of

the examining the relationship of dividend and the stock prices in Nepal using selected firms depending on accessibility of

data from Banking and non Banking industry. The descriptive statistics and regression analysis showed strong effect on

market price per share. It also found that dividend per share has greater effect on stock prices than retained earnings per

share but finally concluded that both affect stock prices of Banking and non Banking sector.

Khan (2012) conducted research on the dividend effects on stock prices, experimental estimation based on the fixed and

random effect model show significant positive relation between stock dividends, earnings per share and profit after tax to

stock market prices while return on equity and retention ratio have negative and statistically insignificant relationship to

stock market prices. Profilet and Bacon (2013) sought to find the impact of dividend policy on stock price volatility in the

U.S equity capital equity capital market. Multiple regression results show leverage and growth both had negative

relationship with stock price volatility, but a positive relationship between payout ratio and stock price volatility was

observed.

Tahir and Raja (2014) sought to find impact of dividend policy on shareholders wealth of oil and gas exploration firms of

Pakistan, using regression and correlation to ascertain the best fitted model for DPR, PER and book value to market value

of equity ratio being the predictor variables and holding period yield as response variable established a correlation

between predictor variables and response variable for all the firms.

2.1.2 Signaling effect of Dividend:

Ross advanced this theory in 1977. He argued that dividends are relevant and that, in an efficient market, dividend policy

can be used by management to signal some information to the market that only they know. For example, if management

pays high dividends, it indicates large projected profits in the future to maintain a high dividend level. This state of affairs

would increase the share price of the firm. Low dividends would showthat the firm expects lowprofits in the future hence

reducing the share price of the company.

The signaling theory proposes that dividend policy can be used as a device to communicate information about a firm’s

future prospects to investors. Cash dividend announcements convey valuable information, which shareholders do not

have, about management’s assessment of a firm’s future profitability thus reducing information asymmetry. Investors may

therefore use this information in assessing a firm’s share price; dividend policy under this model is therefore relevant (Al-

Kuwari, 2009). Nel, Hamman and Smit (2010) investigated whether changes in dividend contain information about future

and/or present changes in earnings in Johannesburg Securities Exchange listed companies and found no evidence that

future increases in earnings are predicted by dividend changes, but these changes are the response to changes in current

and past earnings as managers are reluctant to increase or decrease dividends since a decrease sends a negative signal and

an increase will only occur if managers are confident that the current level of earnings will be maintained in the future.



2.2 Conceptual Framework:

Independent Variables Dependent Variable

Control Variable-

Figure 2.1 Conceptual Framework

2.3 Review of Variables:

This study targeted to find the effect of dividend policy on share holders wealth by incorporating other variables that are

likely to affect share holders wealth besides dividend policy and payout, Growth in earnings/sales, leverage were included

while Firm size was used as control variables and Market price per share as the dependent variable.

2.3.1 Dividend Payout:

Theories and discussions on dividends suggest the relevance of dividend policy but no single model has been developed

that shows how a particular dividend affects firm value. Management however needs to establish dividend policies even

in absence of models. According to Doidge, Karolyi and Stulz (2013) growing companies normally pay lower dividend

and reinvest more of their free cash flows in new projects and expansion, thus providing higher capital appreciation. They

hold the view that those companies attract investors in the higher tax brackets who are keen on maximizing tax burden

and who have no pressing needs for cash.

According to Rapp, Schmid and Urban (2014) retained earnings are incorporated into the price of shares. When a

company follows a 100% dividend payout policy then Dividend per Share will equal the Earnings per Share and its

earnings and dividends would not grow since it does not re invest any earnings (Pandey, 2010). Residual pay out policy is

a common practice with most firms opting to pay dividend from retained earnings left after necessary retention have been

provided for. This implies that dividend will fluctuate from year to year, hence may cause uncertainty to the investors and

the cost of equity may increase, this is confirmed through studies conducted by Hassan and Hosny (2012) using a

questionnaire which found a strong influence on the stock price.

Turki and Ahmed (2013) researched on determinants of dividend policy, the evidence from Saudi Arabia. The result

showed that firms which experience more growth opportunities are likely to reduce their dividend per share because this

is attributed to the fact that the firms will channel the excess funds to profitable investments. Many shareholders use

dividend for current consumption and they may be put to trouble and expense in selling some of their shares to realize a

capital gain. This is in addition to a significant anxiety that a dividend reduction may be costly. This is a view that Fuller

and Goldstein (2011) observed in their signaling effect of dividend. This is a view that has gathered great support from

proponents of the ―Bird in the hand‖ theory (Gordon, 2012). Some companies follow a policy of constant payout ratio. It

involves payment of a constant percentage of earnings as dividends since the annual earnings fluctuate. This policy is

related to a company’s ability to pay dividend since it can only be paid when profits are available hence if the company

incurs losses no dividend shall be paid regardless of the desires of shareholders. It therefore implies that annual dividend

per share would fluctuate causing uncertainty to investors (Pandey, 2010).

A study by Mirza and Azfa (2010) that examined dividend trends for large sample of stocks traded on Indian Markets

indicated that the percentage of companies paying dividend declined. Dividend paying companies were less likely to be

larger and more profitable than non paying companies, though growth opportunities do not seem to have significantly

influenced the dividend policies of Indian firms.

DIVIDEND PAY OUT

-Amount of Dividend payout

GROWTH

-Growth in Market share

FIRM SIZE

-Total assets

SHARE HOLDERS WEALTH

-Market price per share

LEVERAGE

-Ratio of Total Debt to Total

Equity



For companies with fluctuating earnings, the policy to pay a minimum dividend per share with a step up feature is

desirable. Profitable firms with more stable net earnings can afford larger free cash flows and therefore pay larger

dividends. Certain shareholders like this policy because of the certain cash flow in the form of regular dividend and the

option of earning extra dividend occasionally (Baker, 2013).

The dividend payout ratio is measured as dividend per share divided by earnings per share. Researchers argue that market

price of stock increases due to increase in dividend payment because it mitigates the systematic risk (Bravet al., 2013).

Dividend policy is related not only to a decision to pay or not to pay dividends but also to the size and pattern or

magnitude and frequency of the payments. The net profit after taxes belongs to shareholders. But the income which they

really receive is the amount of earnings distributed as cash dividends. Therefore a large number of present and potential

investors may be interested in dividend per share, rather than Earnings per share. Dividend per share is the earnings

distributed to ordinary shareholders divided by the number of ordinary shares outstanding (Pandey, 2010).

Muriuki (2010) carried out a study on the relationship between dividend policies and share prices for companies quoted at

the Nairobi Stock Exchange (NSE). He found an inverse relationship between share prices and dividend for firms which

have constant dividend payout ratio, constant dividend per share plus and residual dividend policy. He however found

positive relationship between dividend and share price when he used constant amount per share as a measure of dividend.

3. METHODOLOGY

3.1 Research Design:

According to Kothari (2004) a research design stands for advance planning of the methods to be adopted for collecting the

relevant data and the techniques to be used in their analysis, keeping in view the objective of the research. Ngumi (2013)

describes research design as a structure, or the blue print of research that guides the process from formulation of research

questions and hypothesis to reporting research findings. The researcher adopted survey research design. According to

Upagade and Shende (2013), a descriptive research design is mainly concerned with the description of facts only. It is a

self-report that requires the collection of equitable information (Orodho, 2005). Descriptive study design is appropriate for

this study because it allows an in-depth study of the effect of dividend policy on shareholders wealth. It allows the

researcher to gather information, summarize, present data and interpret it for the purpose of clarification (Creswell,

2003).The current study sought to clarify the effect of dividend policy on shareholders wealth.

3.2 Population:

According to Mugenda and Mugenda (2003) target population refers to total collection of elements about which the study

wants to make some inferences. The target population of the study consisted of all the 11 listed financial firms at the

Nairobi Securities exchange as at 2015. Secondary data was used to analyze data on the variables under the study.

The following regression models were used according to the variables in the study. Each model was run with and without

the control variable (In order to assess the effects of controls). The control variables also act as the independent variables

on the dependent variable (Niresh & Thirunavukkarasu, 2014).

Model 1: Y = β0+β1 X1+ β2 X2+ β3 X3 +ε

Model 2: Y = β0+β1 X1+ β2 X2+ β3 X3 + β4 X4 + ε

Where

Y = Shareholders wealth

X1 = Dividend payout

X2 = Leverage

X3 = Growth

X4 = Firm Size

ε = error term for the model

β1, β2, β3 and β4 are coefficients attached to each explanatory variable, and they explain the marginal effects of each

variable on the economic growth. β0 is the constant term (Market price per share when independent variables are

excluded)



4. EXPLORATORY ANALYSIS OF THE DATA

Exploratory analysis entails descriptive and trend analysis of the variables used in the study. The measures of central

tendency (Mean, median) and measures of dispersion (Standard deviation) are given. Furthermore, normality of the

variables is tested using Jarque Bera test is given.

4.1 Trend Analysis:

The study conducted the trend analysis in order to establish and graphically represent the change in the variables over

time. This trend gives a picture of the stationarity of the variables.

4.2.1 Trend Analysis of Amount of Dividends:

Figure 4.1: Trend analysis of amount of dividends

The amount of dividends paid by the financial firms listed at the NSE indicated unsteady increasing trends over the study

period as indicated in Figure 4.1. From the year 2006 to the year 2015, financial firms listed at NSE had increased the

amount of dividends paid to their shareholders.

4.2 Descriptive Analysis:

Table 4.1: Descriptive analysis

Share Holders Wealth Leverage Growth Amount Of Dividends Size

Mean 72.052 8.959 (0.340) 8.675 10.006

Median 53.000 3.574 (0.733) 8.585 10.677

Maximum 269.300 281.440 92.614 9.906 11.700

Minimum 1.598 0.005 (93.578) 7.237 6.790

Std. Dev. 63.327 34.026 24.806 0.660 1.443

Skewness 1.360 6.775 0.140 0.231 (0.818)

Kurtosis 4.464 50.179 6.535 2.134 2.015

Jarque-Bera 39.755 10,039.569 47.150 4.013 15.199

Probability 0.005 0.001 0.052 0.134 0.063

The table indicates the descriptive results of the study. The results indicate that over the study period, listed firms

indicated an average market share per price value of 72.05 with a standard deviation of 63.33 implying a big variation in

shareholders wealth between the years over the study period. This implies that shareholders wealth varies greatly between

the years among the listed financial firms.

The findings further indicate an average leverage value of 8.96 with a standard deviation of 34.03 over the study period

which means that the leverage also varies greatly from year to year among the listed financial firms at NSE.



On average, between the year 2006 and 2015, the financial firms listed at NSE indicated a negative growth rate in terms

of the market size of -0.340 percent. Even though the rate is negligible, it implies that on average, financial firms listed at

NSE continued to lose a larger part of the banking market size. This may partly be attributed to stiff competition from

other commercial banks not listed at NSE, DTMS, MFIs and the increase in mobile banking products which otherwise

continue to cover the large part of the unbanked bankable population of Kenya.

Table also indicates that there was a small variation in the size of financial firms listed at the NSE in terms of their total

assets as well as dividend paid as indicated by small standard variations.

The study also gave the probability value for Jarque Bera Statistic. JarqueBera is a test that combines both Skeweness and

Kurtosis to test the normality of data. Under the null hypothesis of a normal distribution, the Jarque-Bera statistic is

distributed with 2 degrees of freedom. The reported Probability is the probability that a Jarque-Bera statistic exceeds (in

absolute value) the observed value under the null—a small probability value leads to the rejection of the null hypothesis

of a normal distribution.

At 5% level of significance, the null hypothesis of normality under the JarqueBera test was conducted. A probability

value less than 0.05 leads to the rejection of null hypothesis of normality and a probability value greater than 0.05 leads to

failure of rejection of the null hypothesis. The results indicate that the data for growth, amount of dividends and size was

normally distributed since the probability value of their Jarque Bera statistic was greater than 0.05 which led to failure of

rejection of the null hypothesis of normality.

4.3 Correlation Analysis:

The study also sort to establish the association between the study variables through correlation analysis. Kothari (2014)

stated that the importance of correlation is to determine the extent to which changes in the value of an attribute is

associated with changes in another attribute. According to Kothari (2014), the correlation coefficient can range from -1 to

+1, with -1indicating a perfect negative correlation,+1indicating a perfect positive correlation, and 0 indicating no

correlation at all. A linearity test was conducted as evidenced by the Pearson correlation coefficient.

Table 4.2: Correlation Matrix

Shareholder

wealth

Amount

of dividends Size leverage

Shareholders wealth Pearson Correlation 1

Sig. (2-tailed)

Amount of dividends Pearson Correlation 0.200 1

Sig. (2-tailed) 0.845

Size Pearson Correlation 0.514 -0.054 1

Sig. (2-tailed) 0.000 0.591

Leverage Pearson Correlation -0.022 -0.132 0.099 1

Sig. (2-tailed) 0.826 0.19 0.329

Growth Pearson Correlation 0.008 0.117 0.074 0.032

Sig. (2-tailed) 0.045 0.271 0.49 0.767

The study findings indicate that shareholders wealth measured as market price per share is positively associated with the

amounts of dividends paid by the firm as indicated by a Pearson correlation of 0.02. The correlation is however not

significant since the significance value (0.845) is greater than 0.05 at 5% level of significance. The findings imply that

share holders wealth (Market price per share) does not rely on the amount of dividends paid in order to change. The

findings are consistent with Ngujiri (2010) who tested the relationship between the dividend payment policies and stock

price volatility for companies quoted at the NSE in the period covering 1998 to 2008 and concluded that dividend

payment decisions of a company alone do not affect prices in companies quoted in the Kenyan market.

4.4 Regression Analysis:

To further investigate the effect of dividend policy on share holders’ wealth among listed financial firms’ on the Nairobi

Securities Exchange, the study employed a linear regression analysis. According to Kothari (2014), regression is the

determination of a statistical relationship between two or more variables. In simple regression, there are two variables,



one variable (defined as independent) is the cause of the behavior of another one (defined as dependent variable). When

there are two or more than two independent variables, the analysis concerning relationship is known as multiple

regressions and the equation describing such relationship as the multiple regression equation.

4.4.1 Effect of Dividend Payout on Shareholders Wealth:

The first objective of the study was to establish the effect of dividend payout on share holders’ wealth among listed

financial firms’ on the Nairobi Securities Exchange. An ordinary least square regression model was used. The results for

the model summary are as presented in Table 4.3.

Table 4.3: Model Summary

Model Summary

Model R R Square

Adjusted

R Square

Std. Error

of the Estimate Durbin-Watson

1 .020a 0.01 -0.01 63.6313 0.619

a Predictors: (Constant), Amount of dividends(logged)

b Dependent Variable: Shareholders wealth

The study findings indicated that dividend payout is positively associated with shareholders wealth (R = 0.020).

Furthermore, dividend payout explains only 1% of the changes in the shareholders wealth (R square = 0.01). The Durbin

Watson coefficient value of 0.619 indicated that the model suffers from the problem of autocorrelation since its value is

between 1 and 3. If Durbin-Watson factors are between (1) and (3) there is no autocorrelation problem (Musiega, Alala,

Musiega, Maokomba & Egesa, 2013). The study hence used robust standard errors to control for autocorrelation.

The results for the model fitness under the analysis of variance (ANOVA) are indicated in Table 4.4.

Table 4.4: Model Fitness (ANOVA)

ANOVA

Model

Sum of Squares Df Mean Square F Sig.

1 Regression 157.08 1 157.08 3.039 0.044

Residual 396796.7 98 4048.946

Total 396953.8 99

a Dependent Variable: Shareholders wealth

b Predictors: (Constant), Amount of dividends (logged)

The findings also indicated that the model for the effect of dividend payout on shareholders wealth fit well and was

sufficient to predict the effect of dividend payout on shareholders wealth. The null hypothesis of unfitness was rejected at

5% level of significance since the significance value was less than 0.05 (Sig = 0.044). The model coefficients are as

presented in Table 4.5.

Table 4.5: Model Coefficients

Coefficients

Unstandardized

Coefficients

Standardized

Coefficients t Sig

Collinearity

Statistics

B

Std.

Error Beta

Tolerance VIF

1 (Constant) 55.434 84.518

0.656 0.513

Amount of

dividends

(logged) 1.915 9.721 0.02 0.197 0.844 1 1

a Dependent Variable: Shareholders wealth

The results indicate that Amount of dividends is positively and insignificantly related to shareholders wealth (B = 1.915,

P-value = 0.844). This implies that dividends policy is not significant in explaining the shareholders wealth.



The model linking dividend payout to shareholders wealth is:

Shareholders wealth = 55.434+ 1.915 (Dividend payout)

The model indicates that other factors held constant, shareholders wealth is 55.434. Furthermore, a unit increase in

dividends paid leads to a 1.915 units increase in shareholders wealth.

The findings of the study are against the bird in hand theory argument that there is a relationship between shareholders

wealth and dividend payout fluctuations (Pandey, 2010). The findings are however consistent with the findings of a study

by Mirza and Azfa (2010) that that there was no difference between dividend paying companies and non dividend paying

firms since dividends don’t significantly affect shareholders wealth nor profitability of the firm. The findings on the other

hand are inconsistent with the findings of a study by Muriuki (2010) which found an inverse relationship between share

prices and dividend for firms which have constant dividend payout ratio, constant dividend per share plus and residual

dividend policy.

The findings are consistent with Walter (1963) Walters model argument that dividend beginning earnings and dividends

never change, internal financing (no debt financing or issue of new shares and infinite time for firm’s life (Pandey, 2010).

4.4.4 Multiple Regression Model without Firm Size:

A multiple regression model was established to determine the relationship between the three predictor variables (Growth,

leverage, Amount of dividends) and shareholders wealth. The results are as presented on Table 4.6.

Table 4.6: Model Summary

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson

1 .251a 0.063 0.03 64.1917 1.89

a Predictors: (Constant), Growth, leverage, Amount of dividends(logged)

b Dependent Variable: Shareholders wealth

The results indicate that, the three predictor variables (Growth, dividend payout and leverage), on average, are jointly

positively associated with shareholders wealth as indicated by a Pearson correlation value, R of 0.251. The results also

indicate that the three variables, jointly explain up to only 6.3% of the changes in shareholders wealth. This implies that

the other percentage, say, 93.7% is explained by other factors not in the model used under this study.

5. CONCLUSION

5.1 Conclusions:

The section provides conclusions of the study based on the study findings. The conclusions have been provided per

objective.

5.1.1 Dividend Payout Policy:

The study sought to establish the effect of dividend payout on share holders’ wealth among listed financial firms’ on the

Nairobi Securities Exchange. The study concludes that shareholders wealth measured as market price per share is

positively and insignificantly associated with the amounts of dividends paid by the firms. The amount of dividends paid is

also positively and insignificantly related to shareholders wealth.

5.2 Recommendations:

Following the findings and conclusions, the study recommends that both current and potential investors who are

predicting future shareholders wealth in a firm should take note of the firm’s financial leverage and size. They should

expect higher shareholders wealth (Market price of the share) among firms with high assets as well as firms with low

leverage ratio.

Another recommendation made by the study is that managers should incorporate policies to pay low amounts of dividends

when their firms have high leverage. This will in turn lead to an improvement in the shareholders wealth.

The study also recommended that the government should make policies that encourage dividend payout when there is a

need to raise more revenue from dividend withholding tax.



5.3 Areas for Further Study:

The study findings indicated that the three predictor variables (Growth, dividend payout and leverage) jointly explain up

to only 6.3% of the changes in shareholders wealth. This implies that the other percentage, say, 93.7% is explained by

other factors not in the model used under this study. Further studies can be conducted to establish the other factors which

explain changes in shareholders wealth in the same study period. Another study can include more years to the study

period so as to compare the findings. The current study concentrated on financial firms only, a similar study can be

conducted focusing on non financial firms also.

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