The effect of scrip dividend on the returns of securities listed at the Nairobi securities exchange

Abstract

Dividends are payments made by a company to its shareholders. Dividend policies are influenced by many factors. Scrip dividends are relevant because they have informational value. Financial signaling theory implies that dividends may be used to convey information. Information, rather than dividends itself, affects returns of securities. Stock dividends supplement, rather than take place of cash dividends. Some scholars argue that Scrip dividend is irrelevant whereas others view it otherwise. There arc also those that argued that the effect of a change in dividends has on the price of a firm's stock is related primarily to information about expected future earnings conveyed by a change in dividends. Thus, the study sets to determine whether there exists a causal relationship between scrip dividend and the returns of securities of a firm. An event study research design was used in the study. The research depended on secondary data from companies' published financial statements. This research was based on all the 60 companies that are listed at the NSE, as at 31 st December 2012. The firms were selected consisting of all the firms quoted consistently at N.S.l: for a period of 10 years from 2003 2012.Dividcnd data on was extracted from published reports of quoted companies.' This information was obtained at the N.S.E library and from the company libraries. Data on the market returns of securities was obtained from the returns of securities as reported by N.S.E. Event study was used in data analysis. From the findings the study concludes that the Kenyan market reacts positively to SCrIp dividend issue announcements. There was an increase in volumes of shares traded after scrip dividend issue as compared to those before the scrip dividend issue. The study also concludes v that managers of the companies sought issues SCrIp dividend to encourage investors to purchase their stock which appeared cheaper. This study showed that there were positive mean returns with respect to scrip dividend, this was in agreement with the signaling hypothesis which stated that managers of companies' issues scrip dividend to act as a means of passing information to stock holders and potential investors.