Effect of dividend policy on share price performance: a case of listed insurance companies at the Nairobi securities exchange, Kenya

Abstract

Dividend policy remains a source of disagreement despite many years of theoretical and empirical research findings. Paying large dividends decreases the risk and therefore influences Security prices. Dividends are relevant because they signal and have informational benefit to investors. The main question to be answered here is how much dividends should be given back to their shareholders?, companies must take this crucial decision period after period. The optimal dividend policy is the one that maximizes the company’s security price, which leads to maximization of shareholders’ wealth. However, Insurance companies listed at Nairobi securities exchange have in recent past, between 2011-2015 announced low dividends, therefore whether or not dividend decisions can contribute and affect the share price of the firm is a debatable issue. The purpose of this study was to determine effect of dividends policy on share price performance of Insurance companies listed at the Nairobi Securities Exchange. This study was guided by the following objectives; to determine the effects of Dividend Payout, to examine the effect of Dividend Yield, to analyze the effect of Earnings Per Share, and to determine the effect of Inflation on Share Price. This study was underpinned by three theories namely; Modigliani and Miller, Gordon's Model and Signaling theory, this study adopted combination of descriptive design and historical research design as well inferential statistics. The target population was six Insurance companies listed at the Nairobi Securities Exchange namely; Jubilee holdings ltd, Pan Africa Insurance holdings, Kenya Re-Insurance Corporation limited, Liberty Kenya Holdings, British American investment company ltd and CIC Insurance groups. Secondary data was collected from the companies’ past financial reports for ten year period between 2006-2015. Panel data was evaluated and analyzed using Stata. Dynamic Regression analysis was used to establish the relationship between dividend Policy on share price of the listed Insurance companies. This study established that dividend payout, dividend yield, earnings per share and inflation are jointly statistically significant in predicting the value of share price for listed Insurance firms. Therefore the study recommends that Insurance firms should consider their dividend policy accurately since they have a great power on influencing share price, hence management should be responsive in declaring dividends. The findings of this study benefits Insurance firms and regulators like CMA, IRA and NSE in decision making.