The Effect of Change in Dividend Policy on Stock Returns of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

The study investigated the effect of dividend policy on stock returns of commercial banks listed at the Nairobi Securities Exchange as at 2014. The study specifically sought to determine whether dividend initiation, mode of dividend payment, dividend timing, profitability, leverage and asset base have any effect on stock returns among listed commercial banks in Kenya. The study adopted descriptive research design. The target population was all the 11 listed financial institutions in Kenya, these included 10 commercial banks and one mortgage finance institution which was included as part of the study since they are regulated by the same prudential guidelines issued byCentralBank of Kenya. All the 11 banks listed were involved in the studyas at 2014. A censussurvey was adopted as the sampling design. The study used secondary data obtained from Nairobi Securities Exchange, Central Bank of Kenya and the various websites of the participating listed banks for the period between 2010 and 2014. Each bank under study was analyzed year by year resulting in 51 data points of study. The data collected was analyzed using descriptive statistics. Data analysis was done with the aid of Statistical Package for Social Sciences software.The studyrevealedthatthere isan insignificantandpositive relationship betweenstock returns and mode of dividendpayments,dividendinitiation, dividendtiming and leverage of listed commercial banks. The fact that the regression coefficients are positive means that increase in one variable corresponds to increase in stock returns. The study therefore concludes that there is an insignificant and positive relationship between dividend policy and stock returns among listed commercial banks at the Nairobi Securities Exchange. The study further revealed that there is a negative relationship between stock returns and profitability and asset base of a listed commercial banks. The study recommends that listed banks should moderately consider the mode of dividend payment, dividend initiation, dividend timing and leverage when formulating dividend policies but with more emphasis on the mode of dividend payment.