Effects of Dividend Announcement on the Performance of Socially Screened Portfolios in Nairobi Securities Exchange

Abstract

Social screening involves prohibiting investments in the securities of companies or industries that an investor perceives to be engaged in socially negative behavior. Dividend policy of a socially screened firm has implications for investors, managers and other stakeholders. For investors, dividends whether declared today or accumulated and provided at a later date are not only a means of regular income, but also an important input in valuation of a socially screened firm. The impact of dividend announcement on stock prices has been a matter of intense debate for academics, the managers and shareholders of many companies for several years. Several theories have been developed to explain the relationship that exists between dividend announcement and stock prices. Studies done in this area have given contradicting findings. The objective of this study was to determine the effect of dividend announcement on the performance of socially screened portfolios in the Nairobi Securities Exchange. The study adopted a descriptive research design in determining the effect of dividends announcement on the performance of socially screened portfolio. Event study methodology was used. The target population for this study consisted of ten (10) socially screened firms listed on the Nairobi Securities Exchange. The companies were selected based on consistency in announcing dividends and trading actively during the forty one days window period. Secondary data was obtained from the firm’s annual reports most of which were publicly available in NSE daily and annual reports. Abnormal returns during the event window of 41 days were determined using the event study methodology employing the market model on data from 10 socially screened companies. Inferential and descriptive statistics were used to test for significance on abnormal returns at 5% level. The t test values obtained from the sampled data over the four periods was less than 5% level of significance. Therefore the null hypothesis that, there is no significant difference between the returns of a socially screened portfolio before and after the announcement of dividends is rejected. The significance of cumulative abnormal returns after dividend announcement indicates that, stock prices for the socially screened portfolios reacted positively to this good news. This generally shows that, the performance of the firms improved after the announcement of dividends. The study was limited to observations based on the announcement of dividend payout by the socially screened firms. Also, the study was not able to account for price behaviour that is influenced by the fundamentals of the company as opposed to speculation. A census study is recommended for any further empirical investigations into NSE dividend announcements.