The Effect of Dividend Announcement on Prices of Stocks Listed at Nairobi Securities Exchange

Abstract

Dividend statement has remained the topic of concern for scholars and for professionals. The worth of a firm‟s shares is frequently employed as a hint of the vigor and the total well-being of a firm. The worth of stocks is regularly determined by prospect of company‟s returns. The overall aim of this research was to establish the impact of the announcement of dividend with respect to prices at the NSE. Specifically, this involved evaluating the effect that dividend declaration has on stock returns for companies listed within each segment, from 2010 to 2015, on the day of declaration and subsequent to the day of the declaration. In addition, the research evaluated the effect on stock prices and stock returns for firms listed within all categories of the NSE before and after the announcement of dividends. Finally, the study examined the effect of the declaration of dividend on stock returns after the actual dividend payment date. This research involved survey of sampled companies as listed at NSE, the stock returns data for some window around the event date of interest, and pooling the resulting remarks to determine the direction and significance of the change in prices of the stocks. The targeted number of companies for this research was the 67 firms on the NSE listing as of 10th September 2016. Further, the study grouped the population into 12 strata whereby 32 firms were the samples selected at random. Consequently, this research used already existing statistics from the NSE records. The cost of shares and dividends were acquired from the NSE 5 years guidebook that give showcases the performance of the firms (financially) starting from the year 2010 to 2015. Finally for data analysis, the research employed day by day records to put the event study at thirty (30) days prior to and thirty (30) calendar days subsequent to the dividend declaration time. Hence, the study established that average abnormal rate of returns were generally negative prior to the announcement date and positive after the date of declaration. There was a general decrease in the aggregate abnormal rate of returns before the dividend announcement date leading to a downward sloping curve and a general increase after the dividend announcement date leading to an upward sloping curve. The study also revealed that the declaration of the dividend affected return on stocks of companies in the NSE listing. It was observed that shares returns are positive before announcement of dividend and negative in the immediate days following the announcement, hence declaration of dividend has a positive impact on returns of stock in companies in the NSE listing. It can also be concluded that the Nairobi Securities Exchange market reacts to new information such as dividend announcement. A conclusion that was made from the study is that the NSE market responds to new data such as the declaration of dividend. This study has recommendations arguing that the Board of Directors and the Management of listed firms make more frequent dividend announcements.