The effect of dividend pay out on the share prices of firms listed at the Nairobi securities exchange

Abstract

This study attempts to explain the effect of dividend payout on share prices of companies listed at the Nairobi Securities Exchange. A census of all the 64 listed companies from the Nairobi Securities Exchange was examined for a period of 5 years from 2010 to 2014. This study was limited to companies that were listed during the 5 year period and those that paid dividends within the study period. The event study methodology was used with a 21-day event window, 10 days before the dividend payment date and 10 days after the payment date and day 0 being the dividend payment date. 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 paid during the period for each of the days. The cumulative average returns were then calculated by summing daily abnormal returns before and after the payment. 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. Generally, the AAR for all the years increased before the payment date but decreased after the payment date. The curve for CAAR was almost flat before dividend payment but sloped slightly downwards after the dividend payment date. This shows that share prices react negatively towards the dividend payment in all the five years. From the test of significance, dividend payment had a statistically significant influence on share prices in all the 5 years hence confirming the existence of a negative effect of dividend payout on share prices of firms listed at the NSE. This study therefore recommends diligence in the handling of dividend payout information among the sector players in a bid to ensure that there is inclusivity of the stock market stakeholders. Therefore, policies guiding the sharing of this information should be availed to enhance market control.