The Impact Of Dividend Announcement On Stock Returns Of Firms Listed At The Nairobi Securities Exchange

Abstract

Dividend announcement should not have an impact on shareholder’s value in an ideal world. This is not the case however in the real world since announcement of dividend is often followed by significant changes in the stocks market price. Empirical studies show mixed evidence about the relationship between the announcement of dividend and the stock returns. The main objective of this study was to determine the effect of dividend announcement on stock returns of firms listed at the NSE. The event study methodology was used with a 61-day event window, 30 days before and 30 days after the announcement of dividend and day 0 being the announcement date of the dividend. A sample of four firms was chosen out of the population of 65 firms listed at the NSE as at the time this study was conducted. The analysis conducted was for a five year period. 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 was plotted for the AAR and CAAR for the period for each of the years to show the trend of Abnormal Returns over the window. It was observed that AAR was negative before the dividend announcement date and positive after the date of the announcement. The graph for the CAAR 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 NSE was rejected. This led to a conclusion that dividend announcement indeed has a positive effect on stock returns for firms listed at the NSE. This study recommends that firms should consider distributing its dividends to the shareholders since it has a positive effect on stock returns