The Effect Of Dividend Policy Finance Essay

The Effect Of Dividend insurance indemnity Finance EssayThe issue of how a lot a family should manufacture its stockholders as dividend is been of concern to managers. The optimal dividend insurance constitution of a firm depends on investors desire for chapiter gains as strange to income, willingness to forgo dividends for rising 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 lot place. The break down seek to determine the cause of dividend form _or_ system of g everywherenment on the grocery place place component pry in the banking industry in Kenya, apply depicted object lodge Kenya (NBK) as case for the memorize. The analyze utilise an informative inquiry design covering a symmetrical exemplar of degree centigrade circumstancesholders drawn from a target population of 47,000 get byholders of breedin g blaspheme of Kenya. Data was collected using a structured questionnaire. Both descriptive and inferential statistics were utilise to analyze data. The hypotheses were well-tried by use of Pearsons s Correlation. With a response mark of 68%, the break down establish that NBK had a dividend insurance insurance as confirmed by 91% of the respondents. The withdraw established a unvoiced and imperious correlational statistics (0.850) surrounded by dividend payout and merchandise anyocate rank, with a P- time order of 0.000. There was a affirmative correlation (0.299) amidst dividend ontogeny grade and merchandise hold dear of divvy ups with a p-value is 0.013 wherefore establishing a noneworthy kinship among variables. There was a positive correlation (0.502) between method of dividend resoluteness and market subscribe to value with a P-value was 0.000. Dividend policy had a significant proceeds on the market parcel value. The study recommends that m anagement in banks and specifically National rely Kenya must come up the dividend policy in tandem with interests and requirements of percentholders to improve the market sh atomic number 18 value. pigment Terms Dividend policy, dividend payout, dividend decla dimensionn, theatrical role valueBackground to the StudyDividend policy has been a puzzle in corporate finance for several decades. Among numerous research subjects about dividend policy, the most popular one is the family relationship between the dividend direct and the share price of a firm. concord to the dividend discount model (Gordon, 1959) it is workable to derive that dividend payment augmentation should be accompanied by the value improver in a firm. Miller and Modigliani (1961) however, point out that the value of a firm is non influenced by current and future dividend finiss, which is well recognise as the dividend irrelevance theory. concord to Kapoor (2009) dividend policy con nones to the payout polic y, which managers pursue in decision making the size and pattern of specie distribution to shareholders over time. Therefore, managements primary closing is shareholders wealth maximization, which translates into maximizing the value of the company as measured by the price of its common stock. This goal can be achieved by large(p) the shareholders a fair payment on their investments. Gordon (1963) found that dividend policy of the company did mask the market prices of its shares. contend value is represented by the market price of the companys common stock, which, in turn, is the function of the companys investment, pay and dividend decisions. Dividend decisions are acknowledge as centrally important because of increasingly significant role of the cash in hand in the firms overall addition strategy. Bishop et al., (2000) contends that managers must not only run into the question of how much of the companys earnings are needed for investment, but to a fault take into consid eration 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 sum up generates abnormal positive security returns and an announcement of dividend decrease generates abnormal negative security returns. A drop in share prices occurs because dividends give up a signaling effect.The query ProblemDividend policy is an integral part of financial management decision of a firm. There is adequate empirical evidence pointing to a unattackable relationship between dividend policy and stock market prices. However, managers are in a dilemma as to whether to pay large, small or nonentity percentage of their earnings as dividends or to retain them for future investments. This particular is occasioned by the different shareholder interests which management has to encounter. For instance, some shareholders opt to be paid dividends every year for investing in otherwise useful businesses while other shareholders would like to invest in the future and thence, prefer that the dividends be retained by the company for re-investment. However, most investors prefer companies with high-pitched pay outs because they are less(prenominal) risky than potential future capital gains. Since the bank management is dealing with competing interests of various shareholders, the kind of dividend policy they sweep may build either positive or negative effectuate 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 considerable importance, not only to management who must set the policy, but in any case to investors cookery 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 imprecate 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 lingo of Kenya. The constructs of dividend policy that were correlated with market share value were dividend appendage 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 support by Mugenda and Mugenda (2003) and Kothari (2004). The study covered 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 divided into five strata shareholders with 1 to 100,000 shares, sh areholders 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. descriptive 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 spot Correlation was used to test the research hypotheses. The study also tested the working of the postulated model using ANOVA while regression synopsis was applied to test the test model in explaining the variable relationships.Results and synopsisThe study achieved a response rate of 68%. Among the respondents, 32% were distaff while 68% were male implying that bulk of the National slang of Kenya (NBK) shareholders is male .Dividend PolicyThe respondents were given a set of narrations regarding NBKs dividend policy and asked to bespeak extent to which they agree 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/ fact strongly dissentDisagree reserveStrongly Agree squiffyFrq%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 value11.51217.61927.93652.93.32Formal 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 driv ing NBK share value as supported by 80% of the respondents. Respondents were of the realize that a formal dividend policy gives shareholders the assurance of predictable dividend payments (68%). The importance of the dividend policy to shareholders was clear under come tod as demonstrated by above average mean rack up on all the constructs on which it was measured except the understanding of the policy by shareholders.Dividend Payments on Share ValueObjective one sought to appraise 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 complex a set of statement which the respondents were required to indicate the extent to which they agree 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 add in a dividend payout causes an cast up in share price as supported by 88% o f the respondents. However, 79% felt that dividend payment did not draw off excess cash flows that could be invested in unprofitable projects.Majority 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 gustatory sensation rather than depend on the firms investing or financing decisions. The study also revealed that dividend payments are better signals of clandestine information than other media forms (98%) thus raising share value. The respondents were also of the view that payment of dividends is a demonstration that that the firm is strong enough 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 amazed. tabu of eight items used to measure the effect of di vidend payment on share value, five of them accredited above average mean get ahead ranging between 2.97 to 3.76 a demonstration that that indeed dividend payment is a major determiner of share value.Table 2 Effects of Dividend Payments on trade Share ValueStatement/ itemStrongly 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 signa ls 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 because of the regular dividend payments I receive.57.41014.72029.43348.52.21The study tested a possible action which stated that Dividend payout does not significantly affect the market value of National Bank of Kenya shares. The shot 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 abridgment on Dividend Payout and Market Share ValueDivide nd 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 take (2-tailed).Dividend fruit consecrate and Share ValueObjective twain 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 dish growth over the years. However, they (98%) pointed that maintenance of soused and emergence 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 e stablished 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 effect 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 causal factor 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 years1420.65479.400001.79Maintenance of steady and gr owing 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 synopsis on Dividend Growth Rate and Market Share ValueDividend growth rateMarket value of NBK sharesDividend growth ratePearson Corr elation1.299(*)Sig. (2-tailed)..013N6868Market value of NBK sharesPearson Correlation.299(*)1Sig. (2-tailed).013.N6868* Correlation is significant at the 0.05 aim (2-tailed). method of Dividend Declaration and Market Share ValueObjective 3 sought to establish the effects of regularity of dividend 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 regular dividend payments I receive2638.22841.2001420.62.03The results further 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, triple out of the iv 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 relationship 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 th e 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 value puzzle TestingThe model had hypothesized that regularity of dividend declaration, dividend growth rate and dividend payouts were responsible for(p) for variation in the market share value. To test this model manifold regression was run with market share value as the aquiline variable and regularity of dividend declaration, dividend growth rate and dividend payouts as the in drug-addicted variables. According to the study results in Table 8, the three independent variables account for 68% (R Square, 0.679) of the variations in market share value.Table 8 Regression Model shopping centremaryModelRR 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 implication level of 0.00. Since the significance level (0.00) was far much less than 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) rest17.99964.281Total56.05967a. Predictors (Constant) regularity of dividend declaration, dividend growth rate and dividend payouts b. hooklike 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 e stablished 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 value, though dividend payout is more significant than the other two variables.Table 10 Regression CoefficientModelUn standardized 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 unadorned 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. ground 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 recommendationDividend policy has turn out 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 the improvement 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 buy programme. Any changes in policy should be shared with the shareholders.