CASH DIVIDEND CHANGE ANNOUNCEMENT EFFECT ON SHARE PRICE RETURNS: EVIDENCE FROM NAIROBI SECURITIES EXCHANGE

Freshia Mugo-Waweru and Pauline Atieno Otieno

The International Journal of Business and Finance Research, 2016, vol. 10, issue 3, 39-47

Abstract: Whether to pay dividends or not is a critical decision that every company must make. Conversely, whether to invest in a divided paying company is decision investors must consider. However, the relationship between dividend and share returns is not clear and how shareholders react to dividend increases or decreases is still a puzzle. This paper seeks to identify if cash dividend change announcements have any effect on share returns. It also examines whether stock price returns react the same to an increase and a decrease in dividend announced. Using daily closing prices from 2005-2012, the paper employs a 40-day event methodology to examine the reaction of share price returns to dividend change announcements before, during and after the event. Results show, dividend announcements have a significant effect on share price returns. Dividend decreases resulted in negative returns while dividend increases resulted in positive returns. Dividend decreases cause a larger decline in returns than an increase leads an increase in returns. Based on this evidence, dividend announcements have information content and hence dividend-paying companies listed in Nairobi Securities Exchange (NSE) should consider this before announcing a change in dividend

Keywords: Dividend Announcements; Share Prices; Abnormal Returns; Information Content (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2016
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