The effect of dividend announcement on stock returns of firms listed at the Nairobi Securities Exchange

Abstract

In an ideal world, dividend announcement would have no impact on the shareholder’s value. In the real world however dividend announcement is often followed by changes in the market prices of stocks. Empirical studies show mixed evidence about the relationship between dividend announcement and stock returns. The objective of this study was to determine the effect of dividend announcement on stock returns of firms listed at the Nairobi Securities Exchange. The event study methodology was used with a 61-day event window, 30 days before the dividend announcement date and 30 days after the announcement date and day 0 being the dividend announcement date. Out of a population of 61 companies listed at the Nairobi Securities Exchange, a sample of five commercial banks was chosen. The analysis was conducted for a period of five years. The abnormal returns were calculated by subtracting the expected returns from the daily returns and adding the dividend payment announced during the period for each of the days after announcement. The cumulative average returns were then calculated by summing daily abnormal returns before and after the announcement. A graph of the average abnormal returns and the cumulative average abnormal returns for the period was then plotted for each of the years to show the trend of abnormal returns over the event window. The average abnormal returns were observed to be negative before the announcement date and positive after the announcement date for all the years. The graph for the cumulative average abnormal returns sloped downwards before the announcement date and sloped upwards after the announcement date for all the years. The graph for the average abnormal returns fluctuated for all the years. The test of significance was conducted for both the average abnormal returns and the cumulative average abnormal returns. The null hypothesis that dividend announcement does not have an effect of stock returns of firms listed at the Nairobi securities Exchange was rejected. This led to a conclusion that dividend announcement had a positive effect on stock returns for firms listed at the Nairobi Securities Exchange. The study therefore recommends that more firms should consider distributing dividends since there is a positive effect on the stock returns