The influence of dividends and earnings announcement on shareholders' value of Companies listed at the Nairobi Securities Exchange

Abstract

Abstract The objective of the study was to analyze the influence of dividend and earnings announcement on stock prices and hence shareholders wealth in the Kenyan economy. The study investigated whether change in dividend announcement leads in a change in stock prices. The time period was 2008-2012 for 10 selected companies that constantly announced dividends and share price in the Nairobi Stock Exchange and it analyzed the trend of dividends and earnings. Data was collected from Annual reports and share price schedules obtained from the NSE and were analyzed using mathematical models which included the cumulative abnormal return and through the use of Statistical Package for Social Science (SPSS). Academic literature suggests that dividend payments should have insignificant impact on shareholders' value on the absence of taxes and market imperfections. Hence, companies should invest excess funds in the positive net present value projects instead of paying out them to the shareholders. Literature also suggests that market valuation of stocks depends on the expected future dividends. If company pays out all of the earnings, funds for future investment will decrease and dividend may not increase in the future. Moreover, when dividend is taxable, paying out more cash would increase the shareholders tax liability. From the study increase and decrease in dividend payments have no major impact on stock prices of firms. Announcement of increase in dividend payments tends to be related with increase in stock price and announcement of decrease in dividend payments tends to be associated with decrease in stock price around the time of dividend announcement. Such market process is known as dividend announcement effect. The results of the study showed that there is less influence of dividends and earnings announcement on shareholders' value.