Abstract
The issue surrounding policy makers is whether dividend announcements have information content. This study investigated into this concept to determine the extent, to which dividend announcements have information content, its effect on firm value and what this implied on the semi strong efficiency of the Nairobi Stock Exchange (NSE). A sample of trading delays in each year for the period 1999- 2003 was drawn from firms listed on NSE. The data was purely secondary data of the firms listed on the NSE, stock prices and dividend announcements. The event study methodology was used analyze information content of dividend announcements for the four firms.The results based on an estimation window of more than hundred trading days per year show that, for the analyzed firms, dividend announcements do indeed convey useful information about the future value of a firm. This empirical investigation came up with the following findings: First Dividend announcements have pertinent information, which is consistent with Modigliani and Miller (1958) information content hypothesis. Second, the information content in dividend announcements significantly affects the firm value as shown by large spikes in the graphs. Third the NSE is not semi strong from efficiency and therefore market participants can make abnormal profits by trading on public information, such as dividend announcements.
Highlights
The study is based on the efficiency of the stock market, which Fama (1965, 1970 and 1991) defines at three levels; weak, semi-strong and strong forms
The results in the study show a significant relationship between unexpected dividend announcements and abnormal stock return; and support the hypotheses that: First, dividends announcements have information content
This means the null hypothesis that dividend announcements have no information content is rejected with 95 percent confidence level
Summary
The study is based on the efficiency of the stock market, which Fama (1965, 1970 and 1991) defines at three levels; weak, semi-strong and strong forms It concentrates on the semi – strong form efficiency and the effects of dividend announcements on firma value. First is theoretical literature developed by Lintner (1956) who postulated that current dividends convey a considerable amount of information about firm value. He noted that at least for large firms, dividends tend to be inflexible in the downward direction; firms tend to make positive dividends announcement to support the higher rate of payment. The two strands of literature allude to the hypothesis that dividend announcements contain information the triviality of the information content of the announcements remains a hot issue and has opened up ranging debate on whether or not dividend announcements have some information contents
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