Do dividend clientele exist? Empirical evidence from Nairobi Stock Exchange

Abstract

The study was designed to test for the existence of dividend clientele among companies quoted on NSE. In the view of conflicting empirical evidence from the test conducted in different context and stock markets, this research paper intended to focus on tax dividend clientele and investigate the situation in Kenya to answer the question; Do dividend clientele exist in Nairobi Stock Exchange? The study population and sample consisted of all 54 companies listed on the NSE over the period between 2005-2008. The companies that did not trade for all the four years under consideration were eliminated. This left a total of 42 companies. These companies were grouped according to their shareholding structure consisting of foreign investors, local institutional investors and local retail individual investors. A particular category of shareholders with more than 25% of shareholding in a company was taken to have effective control. Data regarding cash dividend payment and market prices for each company was collected from NSE. Data on ownership structure was obtained from CMA and NSE. Average dividend yield for each company was determined and stratified into three classes of high, average and low. A chi-square was used to test the hypothesis to accept or reject the null hypothesis. The findings were that dividend clientele exist among firms with effective local institutional shareholders control which could be attributed to their tax advantage on dividend income. However, among foreign investors and local individual investors there was no evidence to support existence of dividend clientele among these investor groups This could be attributed to the tax differential treatment of foreign investors on dividend income, and the fact that capital gains are tax exempt. Local individual investors lack of dividend preference could be attributed to their small shareholdings and hence tax disadvantage suffered by this investor group is minimal. These investors also lack effective control on these companies hence they are unable to influence major policies of these companies including dividend policies.