The Effects of Dividend Announcement on Stock Returns for Firms Listed at the Nairobi Securities Exchange

Abstract

Many studies on the effects of dividend announcement on stock prices have been done over the years. There is a general consensus that in situations of efficient markets, stock prices are a good estimate of the value placed on the security by the market at any point in time. When markets are imperfect, share prices may respond to changes in dividends. In this case, dividend announcements may be seen to convey implicit information about the firm’s future earnings potential. Studies conducted in this area in the advanced capital markets like those in the United States of America, the United Kingdom, Japan and Germany have found that these markets are able to impound information and incorporate such information almost immediately in stock prices. The objective of this was to establish whether there is any statistically significant instantaneous increase in share price resulting from dividend announcement at the NSE. The research design for this study was descriptive in the form of event study methodology. This method is adopted as it has traditionally been used to test the announcement effect of dividend on the firm’s value. The population of interest in this study was all the 63 companies listed at the Nairobi Securities Exchange as at December 2014. The sixty three (63) firms are grouped into twelve (12) categories which are; agriculture, automobile and accessories, banking, commercial, construction and allied, energy and petroleum, insurance, investment, investment services, manufacturing and allied, telecommunication and technology, and growth and enterprise market segment. Data for use in this study was secondary data and was obtained from the NSE and the published reports of the quoted companies. The published reports are publicly available from the companies and the NSE. Data for use included the daily closing stock prices and the announcement dates. The research used an event window of 60 days, 30 days before and 30 days after the date of the announcement. The research findings show that on average, the average abnormal returns for all the years were positive before the announcement date and negative after the announcement date. The figures showing results for average abnormal returns and the cumulative average abnormal returns shows that there are significant changes before and after the announcement of dividends payment as evidenced by the curves.