THE EFFECT OF DIVIDEND POLICY ON MARKET CAPITALIZATION FOR FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE SYLVIA MURUGI WAGIO A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION (FINANCE OPTION) SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI NOVEMBER, 2018 DECLARATION ii ACKNOWLEDGEMENT iii DEDICATION iv TABLE OF CONTENTS DECLARATION......................................................................................................... ii ACKNOWLEDGEMENT ......................................................................................... iii DEDICATION............................................................................................................ iv TABLE OF CONTENTS ............................................................................................v LIST OF TABLES ................................................................................................... viii LIST OF FIGURES ................................................................................................... ix LIST OF ABBREVIATIONS .....................................................................................x ABSTRACT ................................................................................................................ xi CHAPTER ONE: INTRODUCTION ........................................................................1 1.1 Background ........................................................................................................ 1 1.1.1 Dividend Policy............................................................................................ 2 1.1.2 Market Capitalization ................................................................................ 4 1.1.3 Dividend Policy and Market Capitalization ............................................. 5 1.1.4 The Nairobi Securities Exchange .............................................................. 6 1.2 Research Problem .............................................................................................. 7 1.3 Research Objective .......................................................................................... 10 1.4 Value of the Study ............................................................................................ 10 1.4.1 Contribution to theory .............................................................................. 10 1.4.2 Contribution to Practice ........................................................................... 10 1.4.3 Contribution to policy............................................................................... 10 CHAPTER TWO: LITERATURE REVIEW .........................................................11 v 2.1 Introduction ...................................................................................................... 11 2.2 Theoretical Review........................................................................................... 11 2.2.1 Dividend Irrelevance Theory ................................................................... 11 2.2.2 The Bird in Hand Theory ......................................................................... 12 2.2.3 The Signaling Theory of Dividends ......................................................... 13 2.2.4 Tax Preference Theory ............................................................................. 13 2.3 Determinants of Market Capitalization ......................................................... 14 2.3.1 Dividend Policy.......................................................................................... 14 2.3.2 Firm Size .................................................................................................... 15 2.3.3 Management Efficiency ............................................................................ 16 2.4 Empirical Studies ............................................................................................. 17 2.5 Summary of the Literature Review ................................................................ 20 2.6 Conceptual Framework ................................................................................... 21 CHAPTER THREE: RESEARCH METHODOLOGY ........................................22 3.1 Introduction ...................................................................................................... 22 3.2 Research Design ............................................................................................... 22 3.3 Population ......................................................................................................... 22 3.4 Data Collection ................................................................................................. 22 3.5 Data Analysis .................................................................................................... 23 3.5.1 Analytical Model ....................................................................................... 23 3.5.2 Tests of Significance .................................................................................. 24 vi CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND INTERPRETATION ......................................................................................................................................24 4.1 Introduction ................................................................................................. 25 4.2 Descriptive Statistics ........................................................................................ 25 4.2 Regression Analysis ........................................ 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CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS ......................................................................................................................................34 5.1 Introduction ...................................................................................................... 34 5.2 Summary of findings........................................................................................ 34 5.3 Conclusion ........................................................................................................ 34 5.4 Recommendations ............................................................................................ 35 5.5 Suggested areas for further research ............................................................. 36 References ...................................................................................................................38 APPENDIX I: Firms Listed in the NSE ...................................................................42 Appendix II: Firm Revenue (Logs) ..........................................................................43 Appendix III: Firm Profits (Logs) ............................................................................45 Appendix IV: Firm Size/Assets (Logs) .....................................................................47 vii LIST OF TABLES Table 4.1 Normality Test Table …………………………………………………… 27 Table 4.2 Collinearity Test Table ………………………………………………….. 27 Table 4.3 Descriptive Statistics Table ……………………………………………... 28 Table 4.4 Correlation Analysis Table ……………………………………………… 29 Table 4.5 Regression Model Summary …………………………………………….. 30 Table 4.6 ANOVA Table …………………………………………………………. 31 Table 4.7 Regression Coefficients Table ………………………………………… 31 viii LIST OF FIGURES Figure 2.1 Conceptual Framework ………………………………………………… 21 Figure 3.1 Operationalization of Variables ……………………………………..…..24 ix LIST OF ABBREVIATIONS CDS Central Depository System CDSC Central Depository Systems Corporation CMA Capital Market Authority DIV Dividend DPR Dividend Payout Ratio DPS Dividend per share EPS Earnings per share FISMS Fixed Income Securities Market segment IPO Initial public offer MIMS Main Investment Market Segment MM Modigliani and Miller MPS Market price per share NSE Nairobi Securities Exchange POR Payout ratio SPSS Statistical Package for Social Sciences x ABSTRACT xi CHAPTER ONE: INTRODUCTION 1.1 Background As business progressed into earliest form of companies, dividend policies also evolved. The pioneers of investment ideas backed investors’ expectations with ventures. The investors owned “parts” or shares in fractions of eighth, sixteenth, and the like (Baker & Kent, 2009). These organisations were more like partnerships rather than corporations (Baskin, 2009). This practice aimed at raising more capital for every tradeoff. Also, these businesses together with the joint stock firms had no fixed capital that could last longer than the project for which they had been formed. During that time, the payment of dividends followed a basic policy commonly referred to as a liquidating dividend policy. Shareholders are the company’s owners and they make claims to a share of the firm’s profits. They thus get their share of profits through dividends. The higher the firm’s profits, the more likely it is to offer dividends and the more the shareholder will receive as her/his share. Ranti (2013) observed a positive association between market capitalization and dividend payout of firms. Baker & Powell (2000) affirmed that a firm with a high market capitalization is more likely to pay dividends to shareholders. The earnings realized by the firm are a good indicator of the firm’s financial health. Thus market capitalization plays a critical role in dividend pay-outs. This study was guided by the dividend irrelevant theory, “the bird in hand theory” and the signaling theory of dividends. The dividend irrelevant theory