The Effect Of Dividend Policy Finance Essay

The Effect Of Dividend policy Finance EssayThe issue of how much a company should fee its stockholders as dividend is been of concern to managers. The optimal dividend policy of a firm numbers on investors desire for capital gains as opposed to income, willingness to forgo dividends for future returns, and perception of risk associated with postponement of returns. Management is often in a dilemma whether to pay dividends or to retain them for future investments with implications on administer rate. The get sought to determine the cause of dividend policy on the grocery dispense tax in the banking industry in Kenya, using issue argot Kenya (NBK) as case for the contain. The hear applied an explanatory research design covering a proportionate sample of 100 sh arholders drawn from a target population of 47,000 voiceholders of National Bank of Kenya. Data was collected using a incorporated questionnaire. Both descriptive and inferential statistics were used to analyze d ata. The hypotheses were time-tested by use of Pearsons Moment correlativity. With a response rate of 68%, the study open that NBK had a dividend policy as corroborate by 91% of the respondents. The study formal a strong and positive correlation coefficient (0.850) mingled with dividend payout and securities industry dole out valuate, with a P-value of 0.000. There was a positive correlation (0.299) between dividend offshoot rate and merchandise value of shares with a p-value is 0.013 hence establishing a momentous alliance between variables. There was a positive correlation (0.502) between system of dividend answer and market share value with a P-value was 0.000. Dividend policy had a significant effect on the market share value. The study recommends that management in banks and specifically National Bank Kenya must adjust the dividend policy in bicycle-built-for-two with interests and requirements of shareholders to improve the market share value.Key Terms Dividen d policy, dividend payout, dividend declaration, share valueBackground to the StudyDividend policy has been a puzzle in corporate finance for several decades. Among numerous research subjects about dividend policy, the nearly popular one is the relationship between the dividend take and the share harm of a firm. According to the dividend sack model (Gordon, 1959) it is feasible to derive that dividend payment augmentation should be accompanied by the value growing in a firm. Miller and Modigliani (1961) however, point out that the value of a firm is not influenced by current and future dividend decisivenesss, which is well recognized as the dividend irrelevance theory.According to Kapoor (2009) dividend policy connotes to the payout policy, which managers pursue in decision making the size and pattern of change distribution to shareholders over time. Therefore, managements primary goal is shareholders wealth maximization, which translates into maximizing the value of the comp any as measured by the terms of its common stock. This goal can be achieved by giving the shareholders a fair payment on their investments. Gordon (1963) found that dividend policy of the company did affect the market prices of its shares. fate value is represented by the market price of the companys common stock, which, in turn, is the function of the companys investment, financing and dividend decisions. Dividend decisions are recognized as centrally all-important(prenominal) because of increasingly significant role of the finances in the firms overall growth strategy. Bishop et al., (2000) contends that managers must not only look at the question of how much of the companys earnings are needed for investment, but also take into consideration the possible effect of their decisions on share prices. According to Kapoor (2009), share prices of a firm tend to be reduced whenever there is a reduction in dividend payments. An announcement of dividend amplify generates abnormal posit ive security system returns and an announcement of dividend decrease generates abnormal negative security returns. A drop in share prices occurs because dividends have a signaling effect.The research ProblemDividend policy is an integral part of monetary management decision of a firm. There is adequate empirical evidence pointing to a strong relationship between dividend policy and stock market prices. However, managers are in a dilemma as to whether to pay large, small or zero percentage of their earnings as dividends or to retain them for future investments. This situation is occasioned by the various shareholder interests which management has to requite. For instance, some shareholders prefer to be paid dividends every year for investing in other profitable businesses while other shareholders would care to invest in the future and thereof, prefer that the dividends be retained by the company for re-investment. However, most investors prefer companies with higher(prenomina l) pay outs because they are less savage than potential future capital gains. Since the bank management is dealing with competing interests of various shareholders, the kind of dividend policy they adopt may have either positive or negative effects on the share prices of the company. According to Miller and Modigliani (1961), the effect of a firms dividend policy on the current price of its shares is a matter of commodious importance, not only to management who must set the policy, but also to investors planning portfolios and to economists seeking to understand and appraise the functioning of the capital market. It is this basis that the study sought to establish the effects of dividend policy on market share value in the banking industry in Kenya, using National Bank of Kenya as a case for the study.Purpose of the StudyThe purpose of the study the study was to determine the effects of dividend policy on the market share value in the banking industry in Kenya, using case study of National Bank of Kenya. The constructs of dividend policy that were correlated with market share value were dividend growth rate, dividend payout, and regularity of dividend declaration.Research MethodologyThe study adopted an explanatory research design. The design allowed description of the variable characteristics and systematic explanation of the relationships amongst them as supported by Mugenda and Mugenda (2003) and Kothari (2004). The study cover a sample of 100 respondents from a population of 47,000 general public shareholders. The sample was selected through proportionate stratified sampling method where the population was dual-lane into five strata shareholders with 1 to 100,000 shares, shareholders with shares between 100,001 and 200,000 shares, shareholders with 20001 to 30000 shares, shareholders with 300,001 to 400,000 shares and shareholders with over 400,000 shares. A structured, self-administered questionnaire was used to collect data from the respondents. Descri ptive statistics including frequencies, percentages and mean were used to describe variable characteristics while inferential statistics (correlation and regression) were used to determine and explain variable relationships. The research hypotheses were tested using Pearsons Moment coefficient of correlation was used to test the research hypotheses. The study also tested the working of the postulated model using ANOVA while regression analysis was applied to test the test model in explaining the variable relationships.Results and AnalysisThe study achieved a response rate of 68%. Among the respondents, 32% were female while 68% were male implying that legal age of the National Bank of Kenya (NBK) shareholders is male.Dividend PolicyThe respondents were given a set of statements regarding NBKs dividend policy and asked to indicate extent to which they agreed with each one of them. According to the results (Table 1), 91% of the respondents were aware that National Bank of Kenya had a dividend policy. However, 59% indicated that the Dividend Policy was not well communicated to and understood by the shareholders.Table 1 Status of Dividend PolicyStatement/ item potently DisagreeDisagree accedeStrongly Agree symbolizeFrq%Frq%Frq%Frq%National Bank of Kenya has a Dividend Policy57.411.52942.63348.53.32NBK dividends policy is well understood by its shareholders1927.92130.91420.61420.62.34Dividend policy has been and continues to be important factor driving NBK share value11.51217.61927.93652.93.32 buckram dividend policy gives shareholders the assurance of predictable dividend payments002232.43247.11420.62.88The study revealed that the dividend policy has been and continues to be an important factor driving NBK share value as supported by 80% of the respondents. Respondents were of the view that a formal dividend policy gives shareholders the assurance of predictable dividend payments (68%). The importance of the dividend policy to shareholders was clearly underscore d as demonstrated by higher up average mean scores on all the constructs on which it was measured except the understanding of the policy by shareholders.Dividend Payments on Share Value object lens one sought to assess the effects of dividend payout on the market share value of National Bank of Kenya. An assessment of the effects of dividend payments on share value involved a set of statement which the respondents were required to indicate the extent to which they agreed with them. As shown in Table 2, 90% of the respondents pointed out that they considered payment of dividends a major(ip) element in the value of shares, meaning that an join on in a dividend payout causes an increase in share price as supported by 88% of the respondents. However, 79% felt that dividend payment did not remove excess cash flows that could be invested in unprofitable projects.bulk of the respondents (98%) strongly submitted that dividend paying firms are more closely scrutinized by financial analysts to assess managements role in building share value. Further they felt that dividend payments should satisfy shareholders dividend preference rather than depend on the firms investing or financing decisions. The study also revealed that dividend payments are better signals of confidential information than other media forms (98%) and then raising share value. The respondents were also of the view that payment of dividends is a demonstration that that the firm is strong ample and can pass up profitable investments (98%). Moreover, most of the respondents (78%) agreed that they valued their shares at NBK because of the regular dividend payments they received. Out of eight items used to measure the effect of dividend payment on share value, five of them received above average mean scores ranging between 2.97 to 3.76 a demonstration that that indeed dividend payment is a major determinant of share value.Table 2 make of Dividend Payments on grocery store Share ValueStatement/ itemStro ngly DisagreeDisagreeAgreeStrongly AgreeMeanFre%Fre%Fre%Fre%I consider payment of dividends a major element in the value of shares I hold at National Bank of Kenya22.957.42942.63247.13.34An increase in a dividend payout causes an increase in share price00811.82841.23247.12.18Dividend payment removes excess cash flows that could be invested in unprofitable projects005479.41420.6002.21Dividend paying firms are more closely scrutinized by financial analysts to assess managements role in building share value0011.54160.32638.22.97Dividend payments should satisfy shareholders dividend preference rather than depend on the firms investing or financing decisions0011.54160.32638.23.37Dividend payments are better signals of confidential information than other media forms thus raising share value0011.51420.65377.93.76In my view, payment of dividends is a demonstration that that the firm is strong enough and can pass up profitable investments.0011.51420.65377.93.76I value my shares at NBK becaus e of the regular dividend payments I receive.57.41014.72029.43348.52.21The study tested a hypothesis which stated that Dividend payout does not importantly affect the market value of National Bank of Kenya shares. The hypothesis was tested using Pearsons Moment Correlation Coefficient. The test was conducted to establish the relationship between dividend payout and market value of shares. The study (Table 3) revealed a positive correlation (0.850) between dividend payout and market value of NBK shares with a P-value of 0.000, less than the alpha of 0.01 hence establishing a strong and significant relationship between variables.Table 3 Correlation Analysis on Dividend Payout and grocery store Share ValueDividend payoutMarket value of NBK sharesDividend pay outPearson Correlation10.850(**)Sig. (2-tailed)..000N6868Market value of NBK sharesPearson Correlation0.850(**)1Sig. (2-tailed).000.N6868** Correlation is significant at the 0.01 level (2-tailed).Dividend Growth Rate and Share Val ue objective two sought to determine the effects of dividend growth rate on market value of National Bank of Kenya shares. This was a measured on a number of statements in which respondents were asked to indicate the extent to which they agreed with them. As shown in Table 4, all the respondents disagreed with the statement that dividend payments at National Bank of Kenya have been experiencing firm growth over the years. However, they (98%) pointed that maintenance of regular(a) and growing dividend payments increases a firms share value. Further, 98% of the respondents were of the view that adjusting dividend payments towards a target payout ratio will increase a firms share value. The study also established that 78% of the respondents valued the shares they held with National Bank of Kenya because of steady growth in dividend payments contradicting Levinsohn (2003) who observes that paying dividends will influence how a company finances its growth but will not have a lasting ef fect on its value in the marketplace. Though majority of the respondents disagreed with the contention that the dividend payments have been experiencing steady growth over the years, all the others attributes used to measure the effect of dividend growth rate on market share value all the other attributes were favourably rated with mean scores of over 3.3 out of 5 demonstrating that dividend growth is a major determinant in market share value.Table 4 Effects of Dividend Growth Rate on Market Share ValueStatement/ itemStrongly DisagreeDisagreeAgreeStrongly AgreeMeanFre%Fre%Fre%Fre%NBK dividend payments have been experiencing steady growth over the years1420.65479.400001.79 care of steady and growing dividend payments increases a firms share value0011.51420.65377.93.76Adjusting dividend payments towards a target payout ratio will increase a firms share value0011.54058.82739.73.38I value the shares I hold with National Bank of Kenya because of steady growth in dividend payments34.41217 .62029.43348.53.32The study tested a hypothesis which stated that Dividend growth rate does not significantly affect the market value of National Bank of Kenya shares, using Pearsons Moment Correlation. As shown in Table 5, there is a positive correlation (0.299) between dividend growth rate and market value of NBK shares with a P-value of 0.013 less than the alpha of 0.05 hence establishing a high significant relationship between the study variables. This shows that dividend growth rate has a significant effect on market value of NBK shares.Table 5 Correlation Analysis on Dividend Growth Rate and Market Share ValueDividend growth rateMarket value of NBK sharesDividend growth ratePearson Correlation1.299(*)Sig. (2-tailed)..013N6868Market value of NBK sharesPearson Correlation.299(*)1Sig. (2-tailed).013.N6868* Correlation is significant at the 0.05 level (2-tailed). method of Dividend Declaration and Market Share ValueObjective lead sought to establish the effects of regularity of di vidend declaration on the market share value through a set of statements. According to the study findings (Table 6), 77% of the respondents considered regularity of dividend declaration as major element in the value of shares they owned whereas 88% felt that regular dividend declaration caused an increase in share price. Further, 90% of the respondents submitted that regular dividend declaring firms have more shareholders and their share value is high.Table 6 Effects of Regularity of Dividend Declaration on Market Share ValueStatement/ itemStrongly DisagreeDisagreeAgreeStrongly AgreeMeanFre%Fre%Fre%Fre%I consider regularity of dividend declaration a major element in the value of shares I hold at National Bank of Kenya11.51420.62942.62435.33.12Regularity of dividend declaration causes an increase in share price22.968.82841.23247.13.32Regular dividend declaring firms have more shareholders and their share value is high.00710.3710.35479.43.69I value my shares at NBK because of the regu lar dividend payments I receive2638.22841.2001420.62.03The results advance revealed that majority of the respondents (79%) disagreed with the contention that they valued their shares because of the regularity of dividend declaration with a mean score of 2.03 out of a maximum of 5. In general, leash out of the quartette attributes measuring the effect of regularity of dividend payments on share value received high mean scores of over 3 out of 5 implying that regularity of dividend payments is positively related to share price. It follows thereof that when dividends are not regular, the share value drops and vice versa.The study tested a hypothesis which stated that regularity of dividend declaration does not significantly affect the market value of National Bank of Kenya shares using Pearsons Moment Correlation. As shown in Table 7, the study established a positive correlation of 0.502 with P-value of 0.000, less than the alpha of 0.01 hence demonstrating a high and significant rel ationship between the two variables. Therefore, regularity of dividend declaration has a significant effect on market value of shares. The results agrees with Pettit (1972) observations that announcements of dividend increases are followed by significant price increases and that announcements of dividend decreases are followed by significant price drops.Table 7 Correlation Analysis on Regularity of Dividend Declaration and Market Share ValueRegularity of dividend declarationMarket value of NBK sharesRegularity of dividend declarationPearson Correlation10.502(**)Sig. (2-tailed).0.000N6868Market value of NBK sharesPearson Correlation0.502(**)1Sig. (2-tailed)0.000.N6868** Correlation is significant at the 0.01 level (2-tailed).When asked to rate the level of market share value (Figure 1), 3% rated the value as very low, 57% rated it low, with 36% rating the value as high and 4% as very high. This shows that majority (60%) of the shareholders considered the market value of the shares as low.Figure 1 Level of market share valueModel examenThe model had hypothesized that regularity of dividend declaration, dividend growth rate and dividend payouts were responsible for variation in the market share value. To test this model multiple regression was run with market share value as the dependent variable and regularity of dividend declaration, dividend growth rate and dividend payouts as the independent variables. According to the study results in Table 8, the trinity independent variables account for 68% (R comforting, 0.679) of the variations in market share value.Table 8 Regression Model SummaryModelRR SquareAdjusted R SquareStd. Error of the Estimate1.824(a).679.664.530Predictors (Constant), regularity of dividend declaration, dividend growth rate and dividend payouts.The study conducted ANOVA to test determine whether the model works. As shown in Table 9, the F value was 45.110 at significance level of 0.00. Since the significance level (0.00) was far much less t han the alpha level 0.05, it implies that the three independent variables (dividend payout, dividend growth rate and regularity of dividend declaration) contributed significantly to variations in the dependent variable (market share value).Table 9 ANOVA ResultsModelSum of SquaresdfMean SquareFSig.1Regression38.060312.68745.110.000(a)Residual17.99964.281Total56.05967a. Predictors (Constant) regularity of dividend declaration, dividend growth rate and dividend payouts b. Dependent Variable market value of NBK sharesRegression analysis was conducted to determine the effects of dividend payout, dividend growth rate and regularity of dividend declaration on market share value. The study established that an increase in regularity of dividend payout, dividend growth rate and regularity of dividend declaration by one unit would increase market value of NBK shares by 0.615, 0.393 and 0.217 respectively. This implies that all the three independent variables significantly affect market share v alue, though dividend payout is more significant than the other two variables.Table 10 Regression CoefficientModelUn like CoefficientsStandardized CoefficientstSig.BStd. ErrorBeta(Constant).463.2391.939.057Dividend payout.615.075.7588.161.000Dividend growth rate.393.130.2183.015.004Regularity of dividend declaration.217.057.2233.793.000a. Dependent Variable market value of NBK sharesConclusionsIt is palpable that National Bank of Kenya had a dividend policy, which has been and continues to be important factor driving NBK share value. However, it was not well understood by the most of the shareholders. The NBK shareholders considered payment of dividends is as major element in the value of shares as it demonstrated that that the firm is strong enough and can pass up profitable investments. It is also evident that that an increase in a dividend payout causes an increase in share price. It is also clear from the results that dividend payments have been experiencing declining over the last five years. Although, maintenance of steady and growing dividend payments has been confirmed to increase the firms share value, adjusting dividend payments towards a target payout ratio will also increase a firms share value. Consequently, steady growth in dividend payments makes the shareholders value their shares more. Regularity of dividend declaration was also viewed as a major element with regards to the value of shares as shareholders believed that regular dividend declaration caused an increase in share price. Based on the results, dividend payout, dividend growth rate and regularity of dividend declaration significantly influenced the market value of National Bank of Kenya shares.RecommendationsBased on the findings, the study made the following testimonialDividend policy has proven to be of paramount importance with regards to the market share value and thus NBKs management should avail the policy to its shareholders. This grants them an opportunity to contribute to t he returns of the policy. NBK must adjust its dividend policy to improve the market value of its shares. For an optimal dividend policy to be achieved and maintained, the bank management should maintain regular dividend payment, and also pay a special dividend or initiate a share repurchase programme. Any changes in policy should be shared with the shareholders.