Effect of chief executive officer overconfidence on dividend policy of commercial banks in Kenya

Abstract

This research aimed to determine the effect of CEO overconfidence bias in dividend policy of the Kenyan commercial banks. A descriptive research design was used in the study. A census targeting Kenyan commercial banks for the year 2017 was conducted. The study used primary and secondary data attained from questionnaires and the NSE, Central Bank of Kenya annual bank supervision report and respective commercial banks’ websites. Regression analysis was used to establish the effect of CEO overconfidence bias on dividend policy. Questionnaires was used to measure CEO overconfidence bias and two control variables were included, namely; size and liquidity The data gathered was examined using Statistical Package for Social Sciences (SPSS) version 20. Descriptive statistics was used to describe the variables using mean and standard deviation. Correlation analysis was used to establish the association between the variables in form of a correlation matrix. The explanatory power of the independent variables was evaluated using the coefficient of determination R2. The study found that, CEO overconfidence bias had a negative effect on dividend policy. The findings of the study indicated that, the effect was not statistically significant. It also found that, size had a positive effect which was statistically significant while liquidity had a negative effect on dividend policy and was not statistically significant. The coefficient of determination for the regression was found to be 31%. This indicated that, the independent variable explained only 31% of the variation in the dependent variable. The study concluded that, CEO overconfidence bias is a costly affair for commercial banks since it has a negative effect on dividend policy. It also concluded that, size had a positive effect on dividend policy while liquidity had a negative effect. This study recommends that; banks should monitor on the rate of CEOs overconfidence because overconfidence bias appears to affect the dividend policy negatively. Further, future research could be carried on the effects of CEO overconfidence bias on the dividend policy on financial institutions.