The Relationship Between Dividend Announcements and Return on Investments: a Case of Companies Quoted at the Nairobi Stock Exchange

Abstract

This study investigates abnormalities in the changes of the price of the shares during the dividend announcement periods relative to the non event periods. The paper seeks to establish whether dividends play an important role in conveying information on the level of earnings management by companies; that the firm will have available cash flows to be able to release these cash flows to the shareholders in terms of dividends.

The study seeks to establish that the return on investment for the shareholders will not only increase due to the current dividend payout and the increase in price after the particular announcement but also the likely future dividend payouts and consequently, increase in prices on these dividend paying firms. The findings indicate that there is no strong evidence that stock price reacts significantly on the announcement of dividend .

Consequently the announcements of dividends do not carry any new information to the market.. In addition, the study established that there is a positive correlation between the cash flows and earnings and can be explained that whenever a company has cash, then it is in a position to payout dividends. This agrees with the signalling theory where management can use costly dividend to signal expected cash flows.