The effect of dividend declaration on share prices of commercial Banks listed on the Nairobi Securities Exchange

Abstract

The effect of dividend declaration on share prices of the listed companies is a matter of great importance to the investors, the companies making the declaration and the market in general. Dividend declaration is an event that takes place in the day a company holds its AGM. It is an event that the shareholders look forward to since it gives them a chance to reap a return from their investment in the form of dividends. The act of declaring dividend in itself is seen to contain a communication from the management about the companies past performance and the anticipated future performance. These expectations are expressed in the behavior of the investors which in turn influence the share prices of the firm. This study aimed at establishing the effect of dividend declaration on the share prices of the banks listed on the NSE from 2007 to 2011. In 2007 and 2008, the study considered 9 banks since the Co-operative Bank of Kenya was listed on the NSE in December 2008. From 2009 to 2011 the study considered 10 banks comprising all the banks listed on the NSE to date. The study was achieved through the event study methodology covering a total of 91 days for each company’s share trading. 60 days were used as the estimation window from which the regression analysis was performed to obtain parameters for the Market model used to determine the expected returns over the event window period of 31 days and the abnormal returns which were obtained by subtracting the expected returns from the actual returns for the same period. Cumulative Abnormal Returns were obtained by adding the abnormal returns for the 31 days event window period. Cumulative Average Abnormal Returns were arrived at by dividing the CAR by the 31 days of the event window. The findings of this study do not indicate any conclusive pattern of the effect of dividend declaration on the share prices of the banks listed on the NSE. It has been observed that it is not in all cases where the dividend increases have resulted in increase in share prices and not in all cases where dividend decreases have resulted in decrease in share prices. It is the therefore the researcher’s recommendation that further research is carried out to establish the other factors that influence the share prices of the banks listed on the NSE other than or alongside dividend declaration events.