Dividend Payout Ratio and Share Price Performance in Kenya: A Panel Data Analysis

Abstract

This study investigates the effect of the dividend payout ratio on the share prices of firms listed on the Nairobi Securities Exchange (NSE) over the period 2014–2023. The study employed a longitudinal quantitative research design using a census approach, including all 20 firms indexed in the NSE 20 Share Index, yielding 200 firm-year observations. Secondary data were sourced from audited financial statements and NSE price reports. Panel regression analysis was conducted using four alternative specifications: Pooled OLS, Fixed Effects with firm effects only, Fixed Effects with firm and year effects, and Random Effects with firm and year effects. The Hausman specification test (χ² = 28.45, p < 0.001) selected the Fixed Effects model with firm and year effects as the most appropriate estimator. Cluster-robust standard errors at the firm level corrected for heteroscedasticity and within-firm serial correlation. The empirical results revealed that the dividend payout ratio has a negative and statistically significant effect on share prices (β₁ = -0.298, p = 0.045). A one percentage-point increase in the dividend payout ratio is associated with a 0.298 Kenyan Shilling decrease in the share price, holding all other variables constant. This finding was robust across alternative model specifications, outlier exclusions, winsorization, lagged variables, and subperiod analyses. The findings suggest that investors in the Kenyan market interpret high dividend payouts as signals of limited profitable reinvestment opportunities rather than as indicators of financial strength. Corporate managers should exercise caution in increasing dividend payouts, as such actions may be negatively perceived by the market. This study provides the first comprehensive empirical evidence on the dividend payout ratio–share price relationship in the Kenyan capital market, using rigorous panel econometric techniques, and contributes to the limited literature on dividend policy in frontier African markets.