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. 

CHAPTER ONE 
INTRODUCTION 
Background to the study 
The Major fundamental goal of modern corporate entities is to maximize the value of Shareholders through three major goals; the investment function, the financial decisions and the aspect of dividend policy which encompasses the amount to payout as dividends and amount to be retained as retained earnings (Pandey, 2010). Managers have been pursuing dividend policies to maintain the share price which is a measure of firm’s performance. A pioneering study done on dividends Policy and signaling was done by Linter (1956) the study was the most vital literature in the corporate finance world. According to Lintner (1956) who was the first to recognize the information content of dividends, managers generally in making dividend policy decisions looked at the earning of the current period to target level of dividend payout to be paid to shareholders. 

The term market share performance describes the performance of stock comparative with others. According to Fama & French (2001), the long-term goal of a company is to better its company's performance though share value. This noble idea that management must strive to achieve optimum wealth creation coupled with sustainability can only be attained through the execution of financial management functions of dividend policies, investment and finance function which will translate to better command in maintaining high share performance in the market. 

Dividend policies are company's guiding documents on dividend measurement and payment. According to Damodaran (2001), dividend policy of a company can be measured using two common appropriate methods, dividend yield and dividend payout ratio, while the latter being to measure the return an investor can make or generate from dividends alone. Changes in these two financial measures provide information signals in relation to risks facing the firms and future growth earnings of the firms. Apart from dividend policy indicators, investors also see other financial indicators to make decisions pertaining the firms efficiently like earnings per share, retained earnings, firm size, book value among others. 

Dividend Signaling theory indicate that dividends are used to pass company’s information to potential investors. The payment of dividends updates the potential investors and shareholders that the firm's performance is fair. The main purpose of the firm is to improve shareholders’ wealth, resulting into maximizing share performance of the firm through declaring high dividends to investors (Allen, Barnado & Welch, 2000). 

The Kenyan securities exchange market is comprised of sixty-six listed companies at Nairobi Securities Exchange (NSE, 2015). The companies are categorized into 10 sectors, namely; Agricultural Segment, Commercial and Services, Telecommunication, Automobiles, Investments, Banking, Manufacturing, Insurance, Construction, and Petroleum and Energy (NSE, 2015). 

Insurance Firms penetration in Kenya has remained low with total of six listed companies. However despite their number, Insurance companies have been undertaking risks by pooling premiums. They enhance economic development through specialized financial services which range from financial planning, securing of risks inherent in enterprises and risk absorption. This promotes financial stability in the firms and provides security to economic entities and job creation. The ability of Insurance firms to safeguard potential risk in the entities rely on their capacity to post good profits to give value for their shareholders in terms of dividends. A well- managed Insurance industry is a windfall for economic growth as it stimulates smooth flow development (Charumathi, 2012). 

The NSE provides platform where potential investor participates in selling and buying of securities like shares, bonds, debentures, and derivatives. In return the investor received yearly rewards inform of dividend or other benefits based on the policy on dividend of the company. According to Capital Market Authority Manual, (2015). The Insurance industry in Kenya consists of many players and presently have 46 licensed Insurance companies, 4,576 registered agents and 6 registered Insurance companies. In total NSE have combined of 72 firms. Etemesi (2004) points out that Kenya Insurance industry significantly contributes to the Gross Domestic Product of the Kenya economy and ranked first in East Africa region. 

Masinga (2005) points out that a successful Insurance sector is of crucial significant to every modern economy. This is because they encourage savings through investors owning financial instruments like shares and debentures. According to the Insurance regulation Authority Annual Review (IRA, 2015), despite the above benefits, the Insurance sector in Kenya has been performing dismally through declaring low dividends hence the impact on share price is not documented well. Also these Insurance firms have not been contributed enough to gross Domestic product (GDP) due to factors such as, poor internal financial policies like dividend policies and slower economic growth. The Insurance sector need to step up an on the issues in search for a solution to remain fairy competitive, Kenya Insurance Survey (K, I.S, 2015). 

Statement of the Problem 
Insurance sector is a key player of financial system in Kenya and in the region through undertaking risk of business and facilitate transfer of savings for investment through generation of long term funds for investment for economic development and job creation. In the year 2011 Nairobi securities exchange went into transformation and brought in more players with new regulations to enhance trading, most of the studies conducted on the effect of dividend policy on share prices have been carried out in both developed and emerging security exchange markets. Many conflicting findings have been formulated in both market economies. There are those findings which hold that dividend policy affect share price, a case in point are (Eriotis, 2005; Mandal & Rao, 2010; & Hussainey, 2010) among others. On same perspective other studies found contrary findings that dividend policy does not affect share price like (Mohammed & Chowdhury 2010; Sharma 2011; and Ndungu 2014). However, a few studies in Kenya concur and found significant findings that dividends policy affect share price like those of (Shisia et al 2014; & Ogolo, 2012). 

Initially, in Kenya the Insurance firms used to declare high dividends in the past five years. They had posted a combined dividend payout of 29% from 2006 to 2010, during the period 2011 to 2015 the insurance firms have been declaring low dividends at a combined average of 18% dividend payout (IRA,2015). However, there is need to examine the impact of this on share price, it is against this background that this study was conducted to examine the effect of dividends on share price in NSE Kenya over the period 2006- 2015. 

From the previous findings it has demonstrates that few studies have been conducted in Kenya on Insurance Companies, furthermore the few research done on Kenyan perspective have not given a conclusive findings on Insurance firms hence the need to carry out the research on the same. Despite the enormous benefits of the research findings, if the study is not conducted for Insurance firms in Kenya, they will not get requisite information for decision making therefore the current study seeks to fill the knowledge gap.

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Item Type: Kenyan Postgraduate Material  |  Attribute: 47 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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