Effect of dividend policy on the market value of shares of public companies quoted at the Nairobi Stock Exchange (N.S.E)
Bunyasi, Wekesa Gladys
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The study sought to establish the effect of dividend policy on the market value of shares of public companies quoted at the Nairobi Stock Exchange (N.S.E). This involved finding out whether payment or nonpayment of dividends affects the value of a firm as measured by the market share prices. The population of study consisted of the 48 companies quoted at the (N.S.E). The study also looked at the factors that determine dividend payment. Many studies have been done in this area but were not focusing on the effect to the market value of the firm. The study period was the years 1997 - 2005. In order to study the impact of dividend announcement on market value of shares, two measures were used (Uddin, 2003): (i) daily market-adjusted abnormal return (MAAR) and (ii) daily cumulative abnormal return (CAR). MAAR indicates the relative daily percentage price change in the dividend paying stocks compared to the change in average market price. On the other hand, CAR was used to measure the investors' total return over a period starting from 30 days well before the announcement of dividend to 30 days well after the dividend announcement day The NSE 20-share price index was used as the proxy of average market price. The findings reported that the average market adjusted abnormal return (MAAR) on the day of dividend announcement (day t=0) had significantly improved as compared to the values obtained 30 days before the day of announcement. The improvements were attributed to the fact that the information of dividend payment often leaks out to the market a few days before the announcement made by the company. Hence, the announcement of dividend normally carries a surprise to the market. This suggests that market reacts earlier than the actual announcement of dividend. The findings are further reinforced by the fact that the average cumulative returns over the 61 days were high, in most cases above 1.0. This is also additional evidence that tends to confirm that market reacts a few days before the announcement of dividend is made and the investors reap high returns on their investments after the announcements are made.