Abstract
Capital Markets have been reflecting erratic performance coupled with volatility globally, regionally and in domestic market. According to Capital market 2030, the future of equity capital markets report (2018), United States of America outperformed her major emerging markets. The combined United State of American’s Domestic market caps total US$30.4 trillion; total mainland China and Hong Kong was US$10.1 trillion. In 2011, it was US$ 15.6 trillion and US$ 5.7 trillion respectively. United States of America Securities exchanges are now three times the size of their Chinese counterparts compared with 2.7 times in 2011. The growth in the US market has outstripped expectations, while the growth of China and other emerging markets has lagged. Despite Capital markets performance in USA, indices showed volatility in performance of the S&P 500 and the Hang Seng relative to FTSE/JSE, Africa all All-share index and S&P Pan Africa with the FTSE 100 showing relative stability. Among other factors, volatility could be attributed to trade tariffs imposed by the US, primarily impacting China, continuing political. In Kenya, 20 shares Index which is used as a proxy of stock return in this study performed dismally in 2011 as compared to 2012 (Kenya Economic report, 2011). The total number of shares traded went down in 2014 and NSE 20 Share Index declined in the fourth quarter of 2016 (The Kenya economic survey, 2016). With volatility witnessed between 2009 and 2018, analysis of relationship between dividend yield and stock return is imperative. This study used quarterly data between 2009 and 2018. The study is a time series study and research design used is correlation. The data was transformed by converting them to their natural logarithms and then differenced to their first differences. After the first differences, the data became stationary. Results revealed that dividend yield has an inverse significant relationship on Nairobi Securities Exchange 20 Share Index, (t=-2.91, p=0.006). Results of this study are useful to policy makers, investors, regulators and finance analyst. Keywords : Dividend yield, NSE-20 Share Index, Stock Return, emerging markets, Volatility, Capital markets. DOI: 10.7176/RJFA/12-8-01 Publication date: April 30 th 2021
Highlights
This study is anchored on both dividend irrelevant theory and dividend relevant theory
Perfect capital markets means that no investor is large enough to affect the market price of shares, secondly, taxes do not exist or there is no difference in the tax rate applicable to the capital gains and dividends; this means that investors value a shilling of dividend as much as a shilling of capital gain, thirdly, the firm has a fixed investment policy, the fourth assumption is that risk of uncertainty does not exist, that is, investors are able to forecast future prices and dividend with certainty and one discount rate is appropriate for all securities and all time periods
Increase in market price per share leads to decrease in dividend yield which leads to increase in stock return
Summary
This study is anchored on both dividend irrelevant theory and dividend relevant theory. The dividend irrelevance theorem was developed by Modigliani & Miller (1961) who stated that dividend policy has no significant effect on a firm’s share price or cost of capital. They argued that, as the amount of debt financing increases, the marginal cost of capital decreases, dividends could not be used to enhance a firm’s value as there would almost not be any equity capital in the firm. Modigliani & Miller (1961) model holds that dividend policy of the firm is irrelevant since it does not affect the wealth of the shareholders. Perfect capital markets means that no investor is large enough to affect the market price of shares, secondly, taxes do not exist or there is no difference in the tax rate applicable to the capital gains and dividends; this means that investors value a shilling of dividend as much as a shilling of capital gain, thirdly, the firm has a fixed investment policy, the fourth assumption is that risk of uncertainty does not exist, that is, investors are able to forecast future prices and dividend with certainty and one discount rate is appropriate for all securities and all time periods
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