The Effect of Dividend Policy on Market Capitalization for Firms Listed at the Nairobi Securities Exchange

Abstract

Dividends are payments to stockholders from firm’s earnings. Dividend policy is the determination of which portion of cash earnings should be retained in the firm for reinvestment and which funds are paid out to investors from either current or accumulated retained earnings. Market capitalization is an estimation of the value of a business that is obtained by multiplying the number of shares outstanding by the current price of a share. The study sought to establish the effect of dividend policy on market capitalization in firms listed in the NSE. This research was conducted through a descriptive survey design. The descriptive survey design was considered appropriate as it enables description of the characteristics of certain groups, estimation of the proportion of people who have certain characteristics and making of predictions. This study collected quantitative data. Secondary data was used in this study. The secondary data sources were obtained from, financial and annual statements of the listed firms over a period of 5 years (2009-2013) and publications were also used. The data was collected based on the information about the variables. Quantitative data was analyzed by descriptive analysis, while qualitative data through content analysis. The study may provide information to policy makers, scholars and academicians and investors on effect of dividend policy on market capitalization in listed firms in the NSE. From the findings, the study concluded that the dividend policy, return on assets and interest rates significantly affected the market capitalization of listed firms. The most significant factor that affected the market capitalization of the listed firms was return on assets followed by dividend policy and interest rate respectively. The study recommends that the management of the listed firms’ should regularly conduct market research to identify emerging future viable investment opportunities that the firms may exploit to achieve growth in their market value hence enhancing their firm’s market capitalization. Further, the management of the listed firms should address or monitor the levels of debt financing utilized by their firms in order to ensure that it does not adversely affect their firm’s market capitalization. The management of the listed firms also should conduct a research on the different dividend policies to identify the one that helps to maximize their firms’ market capitalization.