The Effect of Dividend Announcements on Stock Returns of Companies Listed at the Nairobi Securities Exchange
Abstract
Dividends has been time and again used to make earnings distributions to shareholders in
addition to capital gains that is realized when investors decides to sell off their stock holdings.
Dividends declared therefore has information that portray the firm as either being liquid or not
in the current market in light of distribution of earnings and the future potentiality of the
company to excel. Dividends announcement fulfils the commitment by management to offer
better returns for the investors given the prevailing economic situations by taking on projects
with positive Net Present Values. Expectation plays a major role in two ways, that if the
announced dividend is up to the shareholders expectation, share prices in the market will respond
positively and equally true is that if the announced dividends fall short of expectations market
price will negatively respond. The study had an objective to determine the effect of the
announcement of dividends and the implications for returns on stock for listed firms at the
NSE.The study employed an event study methodology where the effect of dividends
announcement on stock returns was determined by putting to investigation all companies at the
NSE which had dividends announcement from 2009 to 2013 through an event window of 21
days. The study collected secondary data from the NSE, consisting of stock prices for 10 days
before and after dividend announcement day.NSE-20 share price index was used for 30 pre and
post event day. Abnormal returns were computed over the event window and a graph of
cumulative abnormal return was drawn to highlight the trend. Stock returns were observed to
portray more positive trend immediately after the announcement of dividends, while before the
announcement the trend was varied with two out of five periods considered giving a climb and
the rest dived to the event day. The test of significance rejected the null hypothesis that the
announcements of dividends has no effect over returns of stocks for firms listed at the NSE.This
study established that dividends announcement have significant influence on stock returns at the
NSE trading. We therefore recommend that dividend information be made more transparent to
avoid earnings management and insider trading ,this in addition to accurate reporting of financial
statements, which can be made possible through the action of CMA,NSE trading rules and the
accounting fraternity reporting standards. Investing public too need to be educated on other
dynamics of stock returns such as the general economic situations which informs trading of
stocks and the part that is played by events such as dividends announcement. More companies
too need to consider dividend declaration as it positively influence liquidity at the NSE and
consequently provide positive returns.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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