An empirical justification for introduction of share repurchases at the Nairobi Securities Exchange

Abstract

As an alternative to paying cash dividends, a firm may distribute income to its shareholders by repurchasing its own shares at a premium, through a share repurchase program. In Kenya, by law, a company is not allowed to purchase its own shares like in the developed markets where repurchases are legislated and fully supported. The study aimed at assessing whether there is an empirical justification for introduction and possible adoption of share repurchases at the NSE. It was a crosssectional study; the respondents were senior finance executives of NSE-listed companies. It relied on primary data,which was gathered through questionnaires. Data was analyzed using factor analysis of Likert-scale type of questions, frequency tables, graphs, mean score and cross tabulations and standard deviations. At 88.909% (cumulative percentage)of the total variation in the variables and factors assessed, the respondents identified share repurchases as an important form of dividend payout.Premised on the findings of the study, it was established that there is justification for the introduction of share repurchases at the NSE. Overall, firms’ opinions supported the introduction and adoption of share repurchases at the NSE to correct the valuation of their shares mainly due to its signaling content; to tackle the agency/free cash flow problem; and to attain their desired level of leverage among other financial objectives. The biggest impediment to the introduction and adoption of share repurchases is the law, which prohibits this form of earnings distribution. The study recommends that the government should initiate debate via a concept paper and invite all stakeholders to further air their views on this important topic. This would lay ground for possible amendment of the law to support share repurchases.