The Effect of Divided Policy on the Financial Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

As a company earns profits it can it can pay it back to its investors as dividends or it can retain it within the business for reinvesting. It may however decide to apportion the surplus to both. In taking any of the above course of action, managers should concentrate on how to maximize the wealth of shareholders for whom the firm is being managed. Decision making about dividend policy is one of the most important decision that companies have to make. Dividend policy is dependent on lots of factors such as type of industry, trends of profits, taxation policy and liquidity. The objective of the study was to determine the effect of dividend policy on the financial performance of firms listed at the NSE. The study period was a five year period i.e. 2010-2014. This study involved the use of a descriptive research design using a sample of 20 firms listed at the NSE 20 share index. The population of interest consisted of all the 64 listed firms in Kenya. This study found that dividend policy had a significant positive effect on financial performance of firms listed at the NSE. Except firm size and leverage, the other variables (dividend payout ratio, timing of dividend payments and form of dividend payments) had a significant positive impact on the value of the firm since their p-value was lower than the accepted critical value. Firm size and leverage has a negative effect on financial performance of firms. Correlation coefficient was also used and concluded that dividend policy had a positive correlation with the financial performance of the firm. The study concluded that the major factors that affect financial performance of listed firms are; DPR, form of dividend payments and timing of dividend payments. Other factors such as total assets and leverage have no significant effect on the financial performance of a firm