Cash dividend change announcement effects on share price returns for listed companies in Kenya

Abstract

The policy of dividends has been a puzzle and knowing why companies and investors pay attention to dividends is still problematic. The study covered the period 2005 to 2012 and sought to establish the relationship between cash dividend change announcements and share price returns, the kind of relationship and if share price returns were affected differently between the periods before, during and after the Post Election Violence in Kenya. The study also analyzed the stock price reaction of firms listed on the Nairobi Securities Exchange that announced dividend changes before, during and after the Post- Election violence in Kenya. An event study methodology was used to assess the reaction of shares price returns to dividend change announcement. An abnormal performance around the event date was also analyzed using the daily closing share prices. Results revealed that dividend announcement had significant effect on share price returns for all the periods (before, during and after the crisis period). Further, the type of dividend announced had an effect on the share price returns as dividend decreases resulted to negative returns while dividend increases resulted to positive returns. From this, it was evident that dividend announcement had information content and the information content had significant effect on share price returns. The findings showed that investors became more conscious of the signals in dividends. This study will help managers in dividend policy decisions, as a reference point for investors and assist in future research on dividends as dividend announcement had an effect on shares and they acted as signals affecting share prices indicating investors were aware of dividends as a signal of firms’ future earnings.