An empirical investigation into market efficiency and the effects of Cash dividend announcements on share prices of companies listed on the Nairobi stock exchange

Abstract

An efficient market is one in which prices fully reflect available information. An implication of an efficient market is that no excess returns can be made from this information because current prices already reflect the information. However, Excess returns if any should if any should not be statistically significance from zero (Fox and Opong, 1999). This study inves,ates if the Nairobi Stock Exchange efficiently reacts to dividend announcements in price adjustments. The study extends and improves on previous studies by assessing the speed with which share prices adjust to the information contained in cash dividend announcement using Daily data on Nairobi Stock Exchange from 2000 to 2004.The sample consists of firms making up the Nairobi Stock Exchange(NSE) 20 share Index. To determine the short term reactions to dividend announcements the researcher calculated market adjusted buy and hold returns for the samples for the twenty one day event period (t.b.atis from the day before the announcement to the day after) The results reveal that cumulative market adjusted returns to be significant for ten days before and ten days after the announcement for dividend paying firms .This indicates that share prices are indeed responsive to cash dividends. Ii) However the dividend anticipation by the market, as reflected by price adjustments before and after dividend announcement was poor most probably as a result of inadequate information with regard to both company prospects and dividend policy. Consequently, information insufficiency automatically leads to market inefficiency