EFFECT OF DIVIDEND POLICY ON SHAREHOLDERS’ WEALTH OF COMMERCIAL BANKS LISTED AT THE NAIROBI SECURITIES EXCHANGE

Abstract

In the light of international securities exchange markets that are highly stochastic, lowly efficient and strongly speculative, dividend policy decisions are considered as critical for the firm in recent years. The overall objective of this study was to appraise the effect of dividend policy on shareholders’ wealth of commercial banks listed on the Nairobi Securities Exchange (NSE). The specific objectives were to determine the effect of a fixed rate dividend policy, to assess the effect of fluctuating dividend payout ratio, to examine the effect of a hybrid dividend policy, to determine the effect of residual dividend payment, and to determine the effect of stock dividend policy on shareholders’ wealth of commercial banks listed at NSE. The dividend irrelevance theory, information signaling effect theory, bird in the hand theory, and tax preference theory were evaluated to reinforce the variables that were studied in this research. The study incorporated a descriptive research design to interpret the effect of dividend policy on shareholders’ wealth of commercial banks listed on NSE. The target population encompassed 110 respondents composed of the top management personnel of the 11 commercial banks listed on the NSE. A quota sampling method of data collection was adopted where the questionnaire was administered to the selected respondents. The data was coded into the Statistical Package for Social Sciences (SPSS) for analysis. ANOVA, multiple regression, and Pearson correlation analysis were utilized as the inferential statistics for additional analysis. The regression results for a Fixed Rate Dividend Policy, Fluctuating Dividend Payout Ratio, Hybrid Dividend Policy, Residual Dividend Payment, and Stock dividend policy had significant and positive effect on Shareholder’s Wealth. Hypothesis tests for this study were carried out by regressing the independent variables against shareholders’ wealth as the dependent variable. The null hypothesis was rejected in favor of the alternative hypothesis at a p-value of 0.009, 0.000, 0.043, 0.011, and 0.000 for a Fixed Rate Dividend Policy, Fluctuating Dividend Payout Ratio, Hybrid Dividend Policy, Residual Dividend Payment, and Stock dividend policy respectively which was less than 0.05 at 95% confidence level. In regard to the findings of this research and the subsequent conclusions, the study recommends that: listed banks on NSE should formulate strategic policies and guidelines that advocates for dividend stability and consistency in order to boost the investors’ confidence in their securities thereby maximizing the shareholders’ wealth, a hybrid dividend policy that is flexible and can be embraced by the different stakeholders in the companies should be established, and management should continue to steadily raise earnings, cash flow, and dividend payments; when determining a firm's optimal dividend policy, it is important to take its growth trajectory into account; when retained earnings are more than the funds needed to finance the appropriate investment initiatives, dividends ought to be distributed; and when creating a dividend policy, commercial banks should take into account a number of factors, including their profitability, dividend history, capital ownership structure, investment prospects, shareholder expectations, shareholder tax status, and capital market accessibility as the underlying determinants of an optimal dividend policy realization.