Effect of Dividend Policy on Share Price Volatility of Manufacturing and Allied Companies Listed at the Nairobi Securities Exchange

Abstract

Dividend policy entails financial management decision as to what portion of the earnings of the company, that is, profit after tax should be paid to shareholder as dividends and the percentage to reinvest. Different theories have been put in place in trying to solve the puzzle. The research sought to determine the effect of dividend policy on share price volatility of manufacturing and allied companies listed at the Nairobi Securities Exchange. The study used finite population study of the 9 firms listed under manufacturing and allied at the NSE for a period of 10 years (2013-2022). The study adopted quantitative secondary data; data was collected from companies’ financial statements reports. SPSS software was used to analyze the data through person correlation, descriptive and panel regression statistics. From the analysis dividend payout ratio as a measure of dividend policy had a positively insignificant relationship with share price volatility of the manufacturing and allied firms listed at the NSE for the period 2013-2022.The control variables were earnings volatility, financial leverage and firm size. Financial leverage and dividend payout had an insignificant positive relationship with share price volatility. Firm size had a negative relationship with share price volatility of the firms under study for the study period. Earnings volatility was established to have positive effect that is statistically significant on share price volatility for the study population for the period of study. The study is in support of MM theory of irrelevance of dividend, whereby the value of a firm is determined by earnings and investments decisions but not its dividend policy, issuing dividends does not result to increase in a firm’s ability to generate profit. The study recommends that in formulating and implementing the company’s dividend policy decisions, firms should consider factors like earnings because it was established earnings volatility had a significant positive effect on share prices volatility.