The Effect of Dividend Policy on Share Prices of Multinational and Local Companies Listed at the Nairobi Securities Exchange

Abstract

This paper attempts to determine the effect of dividend policy on share prices of companies listed at the Nairobi Securities Exchange and whether this effect is dependent on whether a company is local or multinational. A sample of 38 listed companies from the Nairobi Securities Exchange was examined for a period of 10 years from 2003 to 2012. This study was limited to companies that were listed for the whole period and excludes those that were listed after the year 2003 or delisted before the year 2012. This study was facilitated by the use of secondary data extracted from annual reports of companies obtained from the Nairobi Securities Exchange. The empirical estimation was based on cross sectional regression analysis of the relationship between dividend policy and share prices for local and multinational companies after controlling for earnings per share, and net asset value per share. The independent variables were dividend payout ratio, earnings per share and net assets value per share. The study made use of dummy variables to represent the nature of the companies, i.e., whether they were local or multinational and established a positive relationship between share prices and dividend policy which was dependent on whether the company was a local or a multinational. From the results we conclude that dividend policy has a significant effect on the share price, however, the effect is not significant for local firms. Dividend payout is highly positively correlated to share prices for multinational firms; however this relationship is negative for local firms with a weak form of correlation