The Effect of Dividend Policy on the Relationship between Liquidity and Firm Value of Firms Listed at the Nairobi Securities Exchange

This study examined the mediating role of dividend policy in the relationship between firm liquidity and firm value among firms listed on the Nairobi Securities Exchange (NSE). Although liquidity is widely recognized as a key driver of firm value, it remains unclear whether dividend policy intervenes in this relationship, particularly in emerging markets. Guided by the Dividend Signaling Theory, the study tested whether dividend payments, dividend yield, or a composite dividend measure mediated the effect of liquidity on firm value. A descriptive longitudinal research design was employed, analyzing panel data from 63 NSE-listed firms over a 15-year period (2007–2022). Liquidity was measured using a composite index of short-term liquidity, debt capacity, and asset convertibility, while firm value was assessed using Tobin’s Q. Dividend policy was operationalized through dividend payout ratio, dividend yield, and their composite average. The Baron and Kenny four-step regression approach, supported by the Sobel test, was used for mediation analysis. The findings confirmed a strong, positive, and significant direct relationship between firm liquidity and firm value. However, none of the dividend policy measures significantly mediated this relationship. These results challenge the applicability of the Dividend Signaling Theory in the Kenyan capital market, suggesting that investors may rely more on other financial indicators than dividend signals. The study recommends that firms focus on sound liquidity management rather than dividend signaling to drive value. Further research is needed to explore sector-specific dynamics and alternative intervening variables. Keywords: Firm Liquidity, Dividend Policy, Firm Value, Nairobi Securities Exchange, Dividend Signaling Theory, Mediation Analysis.