The Effect of Dividend Payout Ratio on Market Capitalization of Firms Listed on the Nairobi Securities Exchange

Abstract

The effect of dividend policy on a firm’s value has remained a puzzle in corporate finance for several decades. The various studies have not been able to conclusively determine the relationship between dividend policy and the resultant value of shares. Since the main objective of financial management is to maximize the market value of equity shares, this puzzle needs further research to ensure development of appropriate dividend policies. The proposed study sought to test the relationship between dividend payout ratio and market capitalization of listed firms on the Nairobi Securities Exchange. The research design was descriptive since the study seeks to establish the relationship between dividend payout ratio and market capitalization. The study utilized secondary data on the selected companies from the NSE. The secondary data was collected from NSE database to investigate the policies used by the target population, factors considered by the target population when paying dividends to their shareholders and whether the dividend policies used by the firms affected their market capitalization. Multiple regression analyses was used in the data analysis, with an objective of testing any existing relationships or interdependence between the two variables, the independent variable (dividend pay-out ratio) and dependent variable (market capitalization). Dividend pay-out ratio affects the value of shares of a firm in the long run and that this relationship is significant and positive. It therefore shows that dividend policy is relevant and therefore affects the share price of a firm hence its value contrary to theories that view dividend policy as irrelevant.