The reaction of stock prices to dividend announcement: segmental evidence from the Nairobi securities exchange

Abstract

The impact of dividend announcement on stock prices has been a matter of intense debate for academics, the managers and shareholders of many companies for several years. Several theories have been developed to explain the relationship that exists between dividend announcement and stock prices. Much research done in this area have given contradicting findings. Modern corporate organizations listed in the security markets periodically communicate their financial performance to stakeholders through dividend announcements. Efficient markets immediately absorb and reflect the new information into the share prices. This study examines the effect of dividend announcement at the securities Exchange (NSE) by analyzing changes in share prices of stock in different segments. The specific objective is to determine how different segment react to dividend announcement. The period covered 2009 to 2013. Abnormal returns during the event window of 61 days were determined using the event study methodology employing the market model on data from 10 listed companies. Inferential and descriptive statistics were used to test for significant on abnormal returns at 5% probability level. There was a significant positive change in stock prices in the Main Investment Market compared to Alternative Investment Market Segment whose positive change was not significant. This is an indication of varied efficiency between the segments