The Impact of Dividend Initiation on Stock Returns of Companies Listed at the Nairobi Securities Exchange

Abstract

Dividends are the distribution of past or present earnings in real assets among the shareholders of a firm in proportion to their ownership. This study investigates the impact of dividends on stock returns of companies that either pay the first dividend in their corporate history or initiate dividends after a 3-year hiatus, listed at the Nairobi Securities Exchange. The study period (2009 to 2014) sampling criteria results to 8 firms for the study sample and uses an estimation window of 140 days and 15-day event window period. The analysis particularly, considers the magnitude of abnormal returns during the days that surround announcements of dividend initiation. This study expects to reveal whether dividend initiation is important to investors at the Nairobi Securities Exchange. It also expects to reveal whether the type of firm’s industry or sector has influence on the investors’ reaction to dividend initiation announcement. This is accomplished by measuring the abnormal returns before, during and after dividend initiation announcements. Using an event study approach, the evidence shows that dividend initiation announcements are greeted positively by investors. Sectorial analysis is made to ascertain if firms in different industries according to the sample react differently to dividend initiation announcement. The sectors included: commercial and services, banking, energy, insurance and telecommunication and technology. The results suggest that all sectors experienced significant effect of dividend initiation announcement. The firms in the telecommunication and technology sector experienced stronger investors’ reaction than firms in the other sectors. The results of this study show that dividend initiation does matter, in a way that is consistent with the signaling hypothesis which states that investors can infer information about a firm’s future earnings through the signal coming from dividend announcements, both in terms of the stability and changes in dividends. Therefore, conveying to the market information about the future prospects of the firm. Policy makers of listed firms should watch carefully and consider dividend initiation as an option to signal to the market about their future performance because investors on the securities exchange attach dividend initiation with value increasing effect on their shares/stocks. There is need for the companies’ management to ensure availability of information to the shareholders. Provision of vital information regarding operations of the firm to the stakeholders will affect positively the performance of the firm as the shareholders will tend to invest along the trends of the business