The Effect of Dividend Announcement on Stock Return Volatility of Companies Listed at the Nairobi Securities Exchange

Abstract

Stock prices are always affected by corporate action and any information that can be perceived by the market as adverse or good. Dividends is important to investors as it is one of the ways they get return on their investments. Thus, dividend information has a potent effect on stock return volatility. Due to limited studies that have been conducted on the same, this study sought to establish the effect of dividend announcement on stock return volatility of companies quoted at the NSE. The study adopted an event study research design approach on a target population of 63 firms listed at the NSE. Secondary data on the firms‟ stock prices was collected for 30 days before and after dividend announcement for 5 years (2011-2015). The study sampled 29 firms which had consistent dividend policies. The study used GARCH model to calculate volatility by determining the heteroskedasticity in the returns. Linear regression analysis was used to determine the relationship between dividend announcement and stock return volatility. The study established that there was significant differences in the stock return volatility before and after dividend announcement. Conducting a GARCH (1,1) model, significant results were established pointing to a GARCH and ARCH effect in the stock return volatility. From the linear regression analysis, a negative but significant regression results were established between stock return volatility and dividend announcement.