The Effect of Changes in Dividend Announcement on Share Returns of Companies Listed at the Nairobi Securities Exchange

Abstract

Dividend changes convey new information about a firm’s future profitability thereby positively affecting a firm’s share return. Changes in a firm’s stock return may also be due to the governance function of dividends. The effect of announcement of a dividend on share return can be seen in two standpoints: if the dividend that is announced is up to expectations of shareholders, the market return of the shares will be positively affected. Whereas, if the dividend that is announced is not up to expectations of the equity investors, the market return of the shares will be negatively affected. The objective of this study was to investigate the effect of changes in dividend announcement on the share returns of firms listed at the Nairobi Securities Exchange. This study employed an event study methodology where the of effect of changes in dividend announcement on the share returns of firms listed at the Nairobi Securities Exchange was investigated for a period of 61 days in pre and post dividend announcement date. The study covered the period between 2010 and 2014 with a sample size of 5 companies. Secondary data collected from NSE on the daily stock prices of the 5 companies and the NSE 20-Shareprice index for 30 day pre and 30 day post dividend announcement date was used. This study established that the events of dividend announcement cause a general increase in share return, the companies’ share returns exhibits erratic positive returns before and after the dividend announcement and that in terms of regression, the test of significance revealed that in overall dividend announcement has significant effect on stock returns of firms listed at the Nairobi Securities Exchange. In conclusion, this study established that the Nairobi Securities Exchange market reacts to new information such as dividend announcement on some years during the study period. Therefore the study recommended that to reduce abnormal reaction of share prices caused by speculative trading by retail investors, the public should be educated on the dividend reported as financial performance of the companies could be influenced by the economic condition prevailing at that time.