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.