Firm Size and Market Value of Firms Trading at the Nairobi Securities Exchange: Does Dividend Policy Offer an Indirect Path?

Abstract

Objective: Research focuses on the direct effect of firm size on the market value at the expense of covariates such as dividend policy. Therefore, this study investigated the mediation effect of dividend policy on the relationship between firm size and market value.

Methodology: Panel research design was employed with a target of 54 companies listed at the Nairobi security exchange in Kenya, operational in the relatively stable economy period between 2008 and 2017. Data were sourced from published audited financial reports. Analysis was done using both descriptive and inferential statistics. The study tested for full mediation, partial mediating, or lack of mediation. Data analysis was facilitated using STATA (version 15) software.

Findings: The results showed that firm size had a negative and significant effect on market value (b₁=-0.378 p<0.001) and that dividend policy had no significant effect on market value, b₂=-0.035, p>0.05. The researcher concluded that there was no ground for mediation.

Originality: The results confirm that dividend policy does not mediate between firm size and market value, albeit in the Kenyan Nairobi Securities Exchange (NSE) context, and provides reasons to explore other proxies of dividend policy. In finding that dividend policy does not mediate in the relationship between firm size and market value, this study becomes the first one to justify working from home during the COVID-19 pandemic since the issue of dividends does not arise working at home.

Practical Implications: The negative effect of firm size on market value is an interesting finding that implies that with the emergence of technology, firm size is inversely proportional to market value. Consequently, small firms can exploit technology more effectively than large firms to boost their market value.