EFFECT OF DIVIDEND ANNOUNCEMENT ON SHARE PRICE CHANGES FOR COMPANIES LISTED AT NAIROBI SECURITIES EXCHANGE, KENYA
SAMWEL KARANJA NDUNG’U
Dividend refers to distribution of a portion of a company's earnings, decided by the board of directors to its shareholders. Although some of the studies have reported that dividend is positively related to Share Price changes, others have reported inverse relationship. There is therefore no consensus as to the nature of the relationship. The study sought to determine the nature of relationship between Dividend per Share and Share Price Changes, and the rate at which Share Prices reflect Dividend Announcement information for stocks traded at the Nairobi Securities Exchange. The target population was all the 57 companies listed at the Nairobi Securities Exchange as at 31stDecember, 2010. Purposive sampling was used to select a sample of four companies. The event study methodology was used to determine the effect of Dividend Announcement on Share Prices. Market Adjusted Abnormal Returns (MAAR) and Cumulative Abnormal Returns (CAR) around the event day were calculated using the Market Adjusted Abnormal Return model.
Secondary data was obtained from Nairobi Securities Exchange. Correlation and t-statistic were used in data analysis. In the first objective the researcher sought to determine the relationship between Dividend per Share and Share Price changes. The researcher computed correlation between Dividend per Share and MAAR, and another correlation between Dividend per Share and CAR. Though the correlation was negative in both cases, at 5% significance level, it was only significant between Dividend perShare and CAR. The study found negative relationship between Dividend Announcements and Share Price changes in companies quoted at Nairobi Securities Exchange. In the second objective the researcher sought to determine the rate at which Share Prices reflect Dividend Announcement information in Nairobi Securities Exchange. The study found Shares have positive returns before announcement of dividend and negative returns in days immediately following the announcement. The returns revert back to positive after about fifteen days after Dividend Announcement. The study establishes the basis for the companies’ management to formulate their dividend policy and also provides information to investors to make right judgment in interpreting dividend announced by companies quoted at Nairobi Securities Exchange.