Cointegration relationship between share prices and Dividend payout among firms listed on Nairobi Securities Exchange, Kenya

Abstract

Dividend payout anticipates causing a price change. The clear disclosure of company's projected future profits is one of the informational components of dividends. Dividend payments are a good indicator that the company is profitable and financially strong in the market. When a company increases its dividend payout, it is a good indicator of the company's expected increase in earnings, which leads to increased demand for the company's shares. Therefore, based on projected future profits, current dividend distribution decisions will change. The experience of price bubbles on NSE due to mispricing is inconsistent with efficient market hypothesis. The aim of this study was to establish the effects of share prices on dividends payout among companies listed in NSE, and to examine the cointegrating relationship between share prices and dividend payout of firms listed on NSE. The study employed explanatory research design. The study targeted 52 firms listed in NSE from 2013-2023 giving a total of 572 observations. The study used secondary data for NSE 20 Share Index prices and dividend. The theories that guided the study were Efficient Market Hypothesis, dividend signaling hypothesis and dynamic Gordon growth and present value model of stock prices. The study tested for stationarity and results confirmed stationary after first difference. The study analyzed the data using STATA and results presented in form of descriptive and inferential statistics. Panel analysis was used to examine the short term effects of dividend on share prices. Westerlund Cointegration Test and Pedroni and Kao Panel Cointegration Test confirmed presence of cointegrating relationship between dividend payout and share prices. Share price was found to have a positive (β=1.1883) and significant (p=0.001<0.05) effect on dividend payout while in the short run there was an insignificant (β=0.0879, p=0.523>0.05) effect of dividend payout on share price. Further, the co-integrating relationship was negative cointegration (β = -5.45, p=0.000) in the long run. That means high shares prices reduced dividend payout in the long-run but increases in the short run. Companies listed in NSE should stabilize dividends. In the short term, a company may choose to maintain or slightly increase dividend payments even if earnings have not significantly grown. This can be a way to signal investors that the company is committed to its dividend policy, which may positively impact share prices. Implement a consistent dividend growth policy, gradually increasing dividends over time. This conveys to investors that the company maintains financial stability and remains dedicated to providing returns to its shareholders. Moreover, it is essential to undertake a study examining the impact of dividend announcements on share prices for firms listed on the NSE and, by extension, in emerging markets. Furthermore, future research should explore how dividend policy influences market returns specifically within the Kenyan context