The Effect of Dividend Policy on Stock Price Volatility: A Kenyan Perspective

Abstract

The objective of the study was to determine the relationship between dividend policy and share price volatility and also to determine other factors which may have potential influence on share price volatility for firms listed at Nairobi securities exchange, Kenya. The study covered the period 2008-2012. Existing studies were carried out in the past under different economic conditions as compared to present economic position hence the findings of this research will add value to the existing pool of  knowledge. A sample of 30 companies which were continuously listed and paid dividends continuously for the five year period was used to make generalization about population. The study employed correlation cross-sectional descriptive research design to deduce the relationship between dividend policy (measured by dividend yield and payout ratio) and share price volatility after controlling for long term debt, firm size and growth in assets. The study used the multiple linear regression model and from the analysis of the basic model, there was no evidence of significant relationship between dividend policy and share price volatility. After modifying the model to include the control variables, the result remained unchanged at 5% level of significance. None of the control variables used had a significant relationship with share price volatility. The findings of the basic regression model showed that dividend yield and payout ratio only accounted for 5.5% of the variations in stock price volatility while from the modified regression model, it was found that independent variables (dividend yield, payout ratio, long term debt, firm size and growth in assets) accounted for 20.8% of the variations on stock price volatility.