The effect of dividend announcement on share prices 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. This study sought to determine the effect of dividend announcement on share prices of firms listed at the Nairobi Securities exchange. The target population was all the 65 companies listed at the Nairobi Securities Exchange as at 30th June 2015 and covered a period of five years from January 2010 to December 2014. Purposive sampling was used to select a sample of 16 companies for the study. A firm must have paid cash dividend consistently during the period between January 2010 and December 2014. In addition, the company must have had enough data points or should not have stopped trading at some point during the period to avoid data gaps. Secondary data was obtained from Nairobi Securities Exchange. The abnormal returns were calculated by subtracting the expected returns from the actual returns during the event window. The cumulative average abnormal returns were then calculated by summing the average 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. Correlation and t-statistic were used in data analysis. The null hypothesis that dividend announcement does not have an effect of stock returns of firms listed at the Nairobi securities Exchange was rejected. The study concluded that dividend announcement had a positive effect on stock prices of firms listed at the Nairobi Securities Exchange. The study establishes the basis for the companies’ management to formulate their dividend policy and also provides information to investors to make right judgment in interpreting dividend announced by companies quoted at Nairobi Securities Exchange. The study recommends that the NSE should adopt policies that would enhance market efficiency for predictability of the market behavior by market players and for enhanced investor confidence in the operations of the market.