Signaling effect of dividend payment on the earnings of the Firm: evidence from the Nairobi stock exchange

Abstract

Signaling theory of dividend stipulates that payment of dividend conveys information to the market with respect to expected future earnings of the company. The theory has attracted research in various dimensions owing to the puzzling nature of the dividend payment and its resultant predictability of the earnings of a firm. However, various scholars have found varied impression created by the payment or non payment of dividend resulting into varied empirical findings on the signaling effect of dividend payment on future earnings of which the study sought to establish. The study was an event study conducted on the companies listed at the NSE that had traded consistent for 10 year period; 2000 to 2009, which were 39 in number. The data was collected on from NSE database on companies’ annual reports on earnings and dividend payout ratios. The study used both parametric tests such as t and f-tests to establish the relationship between dividend payment and the future earnings of companies listed at the NSE. The study also used simple linear regression analysis to measure the relationship between earnings and one year lag of dividend payout ratio. The study concludes that dividend payout ratios positively correlate with future earnings of companies though the relationship is low. The study suggest that further earnings be conducted on the appropriation of earnings and the future earnings of companies so as to bring out clearly what role dividend play in signaling future earnings