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MF
45,3
366
Received 12 September 2017
Revised 5 March 2018
30 April 2018
Accepted 6 May 2018
Managerial Finance
Vol. 45 No. 3, 2019
pp. 366-380
© Emerald Publishing Limited
0307-4358
DOI 10.1108/MF-09-2017-0351
Stock market reaction to cash
dividends: evidence from the
Nigerian stock market
Friday Kennedy Ozo
Department of Accountancy and Business Administration,
Federal University Ndufu-Alike Ikwo, Abakaliki, Nigeria, and
Thankom Gopinath Arun
Essex Business School, University of Essex, Colchester, UK
Abstract
Purpose – Very little is known about the effect of dividend announcements on stock prices in Nigeria, despite
the country’s unique institutional environment. The purpose of this paper is, therefore, to provide empirical
evidence on this issue by investigating the stock price reaction to cash dividends by companies listed on the
Nigerian Stock Exchange.
Design/methodology/approach – Standard event study methodology, using the market model, is
employed to determine the abnormal returns surrounding the cash dividend announcement date. Abnormal
returns are also calculated employing the market-adjusted return model as a robustness check and to test the
sensitivity of the results to β estimation. The authors also examine the interaction between cash dividends
and earnings by estimating a regression model where announcement abnormal returns are a function of both
dividend changes and earnings changes relative to stock price.
Findings – The study find support for the signaling hypothesis: dividend increases are associated with
positive stock price reaction, while dividend decreases are associated with negative stock price reaction.
Companies that do not change their dividends experience insignificant positive abnormal returns. The results
also suggest that both dividends and earnings are informative, but dividends contain information beyond
that contained in earnings.
Research limitations/implications – The sample for the study includes only cash dividend
announcements occurring without other corporate events (such as interim dividends, stock splits, stock
dividends, and mergers and acquisitions) during the event study period. The small firm-year observations
may limit the validity of generalizations from these conclusions.
Practical implications – The findings are useful to researchers, practitioners and investors interested
in companies listed on the Nigerian stock market for their proper strategic decision making. In
particular, the results can be used to encourage transparency and good governance practices in the
Nigerian stock market.
Originality/value – This paper adds to the very limited research on the stock market reaction to cash
dividend announcements in Nigeria; it is the first of its kind employing a unique cash dividends data.
Keywords Dividends, Emerging markets, Price reaction, Nigerian stock market, Signalling effects
Paper type Research paper
1. Introduction
Dividend policy has attracted a great deal of attention and still keeps its prominent place
in the modern finance literature. The relationship between dividend policy and firm value
has been a controversial issue since Miller and Modigliani’s (1961) dividend irrelevance
theory. The assumptions of the dividend irrelevance theory inspired the other hypotheses
which seek to explain the effect of dividends on firm value. One of the most prominent
hypotheses is the dividend signaling hypothesis, which states that, in an asymmetrically
informed market, firms pay dividends to signal private information to the investing public
about their future prospects (Bhattacharya, 1979; John and Williams, 1985; Miller and
Rock, 1985). Since dividends are good predictors of future earnings, the announcement of
dividend increases is viewed as good news and accordingly the stock market reacts
favorably and vice versa (Alli et al., 1993).
 There is a plethora of empirical studies that investigate the prediction of the signaling Stock market
hypothesis, that there is a positive relationship between dividend changes and stock price reaction to
changes. A majority of these studies document that stock prices react to the signaling content cash dividends
implicit in dividend announcements; that is, dividend increases are associated with positive
stock price reaction, while dividend decreases induce negative stock price reaction (e.g. Petit,
1972; Charest, 1978; Aharony and Swary, 1980; Asquith and Mullins, 1983; Bajaj and Vijh,
1990; Barheim and Wantz, 1995; Lonie et al., 1996; McCluskey et al., 2006). However, most of 367
the existing research is replete with evidence from the developed markets. The question that
arises in this context is whether the announcement of dividend changes induce stock price
changes in the same direction in emerging markets as predicted by the signaling hypothesis.
The literature suggests that firms in emerging markets differ from their counterparts in
developed markets in terms of size, information efficiency, corporate governance
institutions, ownership structure, and taxation on dividends and capital gains, and that
dividend policy may be affected by the international context in which it occurs (Kumar and
Tsetsekos, 1999; La Porta et al., 2000; Aivazian et al., 2003; Naceur et al., 2006). Given the
differences in institutional environment between emerging and developed markets, the
current study attempts to provide additional evidence from an emerging market context. It
investigates the stock price reaction to cash dividend announcements by firms listed on the
Nigerian Stock Exchange (NSE) to identify whether or not stock price changes follow
dividend changes in the same direction, as predicted by the signaling hypothesis.
The Nigerian corporate environment presents a unique case in the study of dividend
policy. First, dividends are taxable for individuals, while inter-company dividends are not
taxable for corporations in Nigeria[1]. However, the Nigerian tax system does not impose any
tax on personal income from capital gains. The above analysis shows that in Nigeria, when
companies allocate income to dividends instead of retaining it, they impose a higher tax
burden on individual investors. Tax-based signalling models suggest that the differential tax
treatment of capital gains relative to dividends makes dividends informative about companies’
future earnings (Bhattacharya, 1979; John and Williams, 1985). Thus, in a country where
dividends are tax-disadvantaged such as Nigeria, dividends may be used as a credible signal
of future prospects. Second, like other emerging markets, ownership is highly concentrated in
Nigeria (Adenikinju et al., 2003). A direct consequence of the majority rule in the administration
of a company is the fact that the minority shareholders are at risk of exploitation by the
majority. Despite the protection provided for the minority shareholders in Nigeria by the
Companies and Allied Matters Act 2004, it is not uncommon to find majority shareholders
running a company in an unfavorable manner detrimental to the minority shareholders
(Aduma and Ibekwe, 2017). Therefore, minority shareholders are more likely to rely on the
dividend as a signal. Third, the Nigerian corporate context is characterized by low shareholder
protection, lack of access to information by all shareholders and poor corporate governance
(Abor and Fiador, 2013). This feature suggests that dividends may be an important piece of
information with which investors can value stocks in Nigeria. Finally, Nigerian companies
conventionally go to banks for capital (Ozo, 2014). Since bank financing subjects the firm to the
scrutiny and disciplining effects of banks, dividend payments may not be used as a
mechanism to reduce the tendency of managers to overinvest free cash flow in Nigeria.
In the light of the above unique institutional environment, therefore, the Nigerian stock
market appears to be an interesting context in which to examine the dividend signaling
hypothesis in an emerging market with institutional features and tax structures
significantly different from those in most Anglo-Saxon countries such as the USA and
the UK. Given the weak corporate governance and limited institutions in Nigeria, we expect
cash dividend announcements to send a reliable signal to the Nigerian stock market.
The remainder of the paper is organized as follows. Section 2 presents a brief literature
review regarding stock market reaction to dividend announcements. Section 3 gives an
MF overview of the Nigerian stock market. Section 4 describes the data and the methodology
45,3 employed in the study. Section 5 presents and analyzes the empirical results of the stock
price reaction to cash dividend announcements. Section 6 concludes the paper.

2. Literature review
The stock market reaction to dividend announcements has been widely examined in the
368 context of developed capital markets. The great majority of these studies attempted to
quantify how share prices respond to the announcement of changes in dividends in order to
determine whether or not share prices move in the same direction with dividend change
announcements (e.g. Petit, 1972; Charest, 1978; Aharony and Swary, 1980). In general, the
conclusion from these studies is that dividend increases are associated with significant
positive abnormal returns, while dividend decreases induce significant negative abnormal
returns. The announcement of a no change in dividends is associated with normal returns.
In one of the earliest studies of stock market reaction to dividend announcements,
Petit (1972) examined the information content of dividends using 1,000 monthly and
135 daily dividend announcements of 625 US firms over the period 1964–1968. The
findings suggest that stock prices react significantly to dividend announcements, which is
consistent with the information content of dividend announcements. However, another
US-based study by Watts (1973) examined the association between unexpected dividend
changes, positive future earning changes and subsequent excessive stock returns using a
sample of 310 companies and found that the information content in dividends about future
earnings is trivial.
Many subsequent studies have investigated the impact of dividend announcements on
stock prices from a variety of perspectives. For example, a number of studies have examined
the stock price reaction to the announcement of changes in regular dividends (Charest, 1978;
Aharony and Swary, 1980; Woolridge, 1982; Divecha and Morse, 1983; Bajaj and Vijh, 1990;
Barheim and Wantz, 1995; Nissim and Ziv, 2001; Lie, 2005). The results are similar to those
reported by Petit (1972) and support the notion that share prices react to company
announcements about dividend changes. Other researchers have examined the market
response to the announcement of major changes in a firm’s dividend policy such as a
dividend initiation and/or omission (Asquith and Mullins, 1983; Benesh et al., 1984).
The results are consistent with the proposition that changes in existing dividend levels are
both preceded and followed by distinctive earning patterns.
Other researchers have examined the impact of the concurrent announcements of earnings
and dividends on stock prices using US data and a new strand of the signaling literature
based upon interactive signals has rapidly developed (Kane et al., 1984; Eddy and Siefert,
1992). The results indicate that unexpected earnings and dividend announcements induce
abnormal returns and when earnings and dividends are both increased, the stock market
reaction is more favorable than when one variable is increased in isolation. The impact of
joint announcements of earnings and dividends on stock prices has also been examined in
countries other than the USA. For example, Easton (1991) examined the interaction effect of
concurrent announcements of dividends and earnings using Australian data and report that
the joint announcements of dividends and earnings contain information relevant to stock
valuation. Similarly, Lonie et al. (1996) investigated the market reaction to joint earnings and
dividends announcements for a sample of 620 firms listed in the UK. Their analysis indicates
that both earnings and dividends have information content, but earnings announcement
had greater impacts on stock prices than did dividends. Later, another UK-based study by
Gunasekarage and Power (2006) also confirmed the findings of Lonie et al. (1996).
Examination of stock market reaction to dividend announcements have also been
extended to emerging markets, albeit relatively few. Bandara (2001) examined the
information content of dividend announcements employing data from the Colombo Stock
Exchange of Sri Lanka. The results indicate that stock prices react significantly to dividend Stock market
announcements. Using data from Cyprus, Travlos et al. (2001) examined the market reaction reaction to
on announcement of cash dividends and report results consistent with the information cash dividends
content of dividends. In contrast, a study by Chen et al. (2002) on stock price reaction to
dividend announcements in the Chinese stock market did not find any discernible
association between dividends and stock returns. In a similar vein, Akbar and Baig (2010)
report negligible abnormal returns for cash dividend announcements in Pakistan. However, 369
recent studies of the impact of dividend announcements on stock prices of firms in emerging
markets document results that support the signaling hypothesis of dividend
announcements (Al-Yahyaee et al., 2011; Dharmarathne, 2013). For example, Al-Yahyaee
et al. (2011) examined the stock market reaction on announcements of cash dividends in
Oman. They find support for the information content of dividends; dividend increases are
associated with positive price reaction, and vice versa.
Despite the relative wealth of studies on the impact of cash dividend announcements on
stock prices, only one study has examined the Nigerian stock market reaction to cash dividend
announcements. Adelegan (2009) examined the speed of adjustment of stock prices to the
announcement of cash dividends on the Nigerian stock market from 1990 to 1999 using daily
return data. The results of the study suggest that stock prices respond negatively for all the
dividend omission sub-samples before and after the date of the dividend announcement and
positively for the dividend-paying sub-samples after the dividend announcement. The results
of the study also show that stock prices drift 30 days after the dividend announcement,
implying that the Nigerian stock market is not semi-strong efficient. However, the study did
not take into account the effect of other announcements that occurred before and after the
cash dividend ex-dates. The current study examines the stock market reaction to cash
dividend announcements occurring with no other corporate events such as interim dividends,
stock dividends, stock splits, and mergers and acquisitions, within ten days before or after the
cash dividend announcements.

3. The Nigerian stock market

The Lagos Stock Exchange (LSE) was incorporated as a limited liability company in 1960 to
provide the mechanism for mobilizing public and private savings for productive investment
in the economy. The NSE, which prides itself as the, “gateway to African markets,” evolved
from the LSE in 1977. As of today, the NSE services the second largest financial center in
sub-Saharan Africa. The NSE is relatively small when compared to other stock exchanges in
the world. For example, by the end of 2012, only 194 companies were listed. During the
period of our study (2008–2012), the market capitalization of listed companies decreased
from ₦13.29tn in 2007 to ₦9.56tn in 2008, before rallying to close at ₦9.92tn in 2010. This
drop in terms of market value was due to the global financial crisis which affected stock
markets all over the world. In 2012, the market capitalization climbed to ₦14.08tn,
suggesting that the market is beginning to recover from the effect of the global financial
crisis. The total value of traded securities of listed companies declined from ₦2.38tn in 2008
to ₦634.8bn in 2010, but rose to ₦657.8bn in 2012 (Ozo, 2014).
The main index used in the Nigerian stock market is the Nigerian Stock Exchange
All-Share Index (NSE-ASI), which is a market-capitalization-weighted index (a value-weighted
index) of all shares traded on the NSE. This index has a base value of 100 and only ordinary
shares are included in its computation. This index is value relative and is computed daily. In
addition to the All-Share Index, the NSE also introduced five sectoral indices to enhance the
trading and performance measurement among various sectors of the Nigerian equity market.
These indices include: the NSE 30 Index, the NSE Banking Index, the NSE Insurance Index,
the NSE Consumer Goods Index and the NSE Oil/Gas Index. These indices were based on a
number of criteria, including market capitalization and liquidity. While the NSE 30 Index
MF tracks the performance of the 30 most liquid stocks representing the industry sector, the NSE
45,3 Insurance Index provides an investible benchmark to capture the performance of the most
capitalized and liquid companies in the insurance sector. The other remaining three indices are
based on the market capitalization methodology and are designed to provide investible
benchmarks to capture the performances of the NSE Banking, Consumer Goods, and Oil and
Gas sector, respectively (Ikoku and Okorie, 2010).
370
4. Data and research methodology
4.1 Data and sample selection
The samples in this study are selected from listed companies on the Nigerian stock market
that announced cash dividends between January 1, 2008 and December 31, 2012[2]. The
closing share price and stock index (NSE-ASI) were extracted from the Cash Craft Asset
Management Database and the Peace Capital Market Database. Announcement dates of
cash dividends, stock dividends, interim dividends and earnings were obtained from the
Peace Capital Market Database and the NSE library.
All listed companies that met the following criteria were included in the sample:
• Shares traded on the NSE for at least 12 months before and after the cash
dividend announcements.
• Interim and stock dividends were not declared during the event period.
• Price data were available for the period commencing from 130 days prior to the dividend
announcement date and 10 days subsequent to the dividend announcement date.
• To avoid confounding effects, observations accompanying other corporate events
(such as share repurchases, stock splits, subscription rights and mergers and
acquisitions) were eliminated from the final sample, within ten days before or after
the dividend announcement (−10, +10).
The above criteria resulted in a final sample of 252 cash dividend announcements.
Table I presents the distribution of the cash dividends included in the final sample by year
and direction of the dividend change announcements. As the table reveals, there are 109
dividend increases (43 percent), 87 dividend decreases (35 percent) and 56 no change in
dividends (22 percent). The evidence from this table indicates that majority of Nigerian
listed companies increased their dividends during the period of this study.

4.2 Methodology
We employ a standard event-study methodology to investigate the stock market reaction to
cash dividend announcements in Nigeria, following the approach in Al-Yahyaee et al. (2011).

Year Dividend increase Dividend decrease No change in dividends Total

2008 13 17 11 41
2009 21 27 14 62
2010 30 18 05 53
2011 31 13 12 56
2012 14 12 14 40
Total 109 87 56 252
Table I.
Cash dividends by Notes: This table shows the cash dividends by year and direction of the dividend change announcements for
year and direction of a sample of Nigerian listed firms that announced cash dividends over the period January 1, 2008 to
the dividend change December 31, 2012. The sample contains 252 cash dividends, consisting of 109 dividend increase, 87 dividend
announcements decrease and 56 no change in dividends
We estimate the daily abnormal return, daily average abnormal return, and the cumulative Stock market
average abnormal return using the market model (Strong, 1992). We estimate the reaction to
parameters of the market model from a regression of daily stock returns from 130 to cash dividends
11 days before the cash dividend announcement date (t ¼ −130 to t ¼ −11). Day t is
designated as the dividend announcement date, where t is defined as the occasion of the
very first official statement on dividends that can be identified in press releases such as
nationally circulated financial papers or other databases (Gurgul et al., 2003)[3]. The event 371
period comprises of a total of 21 days, measured from day –10 to day +10 after the cash
dividend announcements[4].
For this analysis, the daily return data of the sample companies listed on the Nigerian
stock market are used to detect the presence or absence of abnormal stock return
performance in an event window surrounding the cash dividend announcement date.
The daily return data are favored to their weekly or monthly counterparts because daily
return data allow the impact of dividend news to be isolated, thereby diminishing the
probability of contamination from other signals (Dyckman et al., 1984; Morse, 1984;
Brown and Warner, 1985). The daily stock price returns for each of the companies for the
21-day event period are calculated using the logarithmic approach as follows:


Rjt ¼ Ln P jt =P jt1 ; (1)

where Rjt is the daily return of firm j on day t; Ln is the natural log; Pjt is the share price of
firm j on day t; and Pjt-1 is the share price of firm j on day t−1.The exclusion of dividends
when estimating the returns for shares of the firms in the sample does not affect the results
of this study because share prices are automatically adjusted for cash dividends by the NSE
on ex-dates. The daily stock market returns (returns on the market) is estimated using the
NSE-ASI index (a value-weighted index).
We estimate the expected returns for every share using the market model:


E Rjt ¼ aj þbj Rmt þejt ; (2)

where Rjt is the actual returns on stock j on day t; αj, βj the intercept and slope, respectively,
of the linear relationship between the return, for stockj and the returns of the NSE; Rmt the
return on the NSE index on day t; and ejt the error term of stock j at period t and is expected
to have a value of 0.
The abnormal returns (ARjt) for stock j on day t is then estimated by subtracting the
actual return on day t from the expected return predicted from the market model:


ARjt ¼ Rjt – aj þbj Rmt ; (3)

where ARjt is the abnormal return on stock j on day t, Rjt is the expected return on stock j on
day t (obtained from the market model), and Rmt is the return on the market portfolio on day
t, proxy by the NSE-ASI index. For this study, the coefficients α and β are ordinary least
squares estimates of αj and βj estimated from a regression of daily stock returns on daily
market returns over a 120 trading day period prior to the dividend announcement date
(Dt-131 to Dt-11).
The daily average abnormal returns for day t are calculated as follows:
X
n
ARjt
ARjt ¼ ; (4)
j¼1
N

where ARjt is the weighted average portfolio abnormal return for dividend-increasing firms,
dividend-decreasing firms, and for dividend no-change firms, N is the number of events in
MF the sample. The cumulative average abnormal returns in the days surrounding the dividend
45,3 announcement dates are calculated by summing average ARs over time as follows:

X
L
CARt ¼ ARjt ; (5)
t¼k

372 where CARjt is for the period from t ¼ K days until t ¼ L days.

4.3 Robustness and sensitivity test

A typical feature of an emerging market, such as Nigeria, is the existence of non-trading or
infrequent trading, usually known as thin trading problems. Thin trading refers to a
situation where corporate information is often neither reliable nor available to all traders.
Infrequent trading in the Nigerian stock market is attributed to the market microstructure
and the concentrated ownership structure of companies (Campbell and Ohuocha, 2011).
Using the market model, serious bias arises where beta estimates are calculated for shares
that are infrequently traded (Dimson, 1979; Brown and Warner, 1985). In other words,
infrequently traded shares have a beta estimate which is biased downwards. In this study,
thin trading effects on beta estimates were corrected using an aggregate coefficient
estimator, which does not require that a trade occurs in every return interval (Dimson, 1979).
In addition, abnormal returns were also calculated by employing the market-adjusted return
model as a robustness check and to test the sensitivity of the results of this study to beta
estimation, following the approach in Charest (1978) and Al-Yahyaee et al. (2011). Using the
market-adjusted return model, abnormal returns are computed by subtracting the NSE daily
market return from the observed stock’s return over a given period of time[5].

5. Empirical results
In this study, we examine the impact of cash dividend announcements on stock prices. We
test the signaling hypothesis by splitting the whole sample of Nigerian listed companies that
announced cash dividends without any other corporate announcements within the event
window into three groups according to the direction of the dividend change announcements:
dividend increase, dividend decrease, and no change in dividends. To test the null
hypothesis, which predicts insignificant (zero) stock price response to dividend
announcements, we follow the approach in Graham et al. (2003), Adams and Mansi
(2009), and Al-Yahyaee et al. (2001), and employ a parametric t-test, where t-statistics are
calculated using cross-sectional standard deviation.

5.1 Share price reaction to dividend increase announcements

Table II displays the daily average abnormal returns around the dividend increase
announcements, using both the market model and the market-adjusted return. The literature
suggests that an announcement of a dividend increase is followed by a significant price
increase. The results of this study are consistent with this proposition.
The results show that there is a significant change in stock prices as a result of dividend
increase announcements. Specifically, the average abnormal return earned on the dividend
announcement date (day 0) by dividend increasing companies is 0.82 percent, with a
t-statistic of 2.13. The positive stock price reaction on the dividend announcement date is
consistent with the notion that a dividend increase conveys positive information to the
market resulting in share price appreciation. This finding is consistent with those reported
in the US and other stock markets (e.g. Asquith and Mullins, 1983; Lonie et al., 1996; Gurgul
et al., 2003; McCluskey et al., 2006; Al-Yahyaee et al., 2011).
Days AR (market model) t-statistics AR (market-adjusted return) t-statistics
Stock market
reaction to
−5 0.07 0.22 0.13 0.40 cash dividends
−4 −0.04 −0.13 0.01 0.05
−3 0.20 0.67 0.14 0.46
−2 −0.20 −0.61 −0.28 −0.83
−1 0.68** 2.22 0.61 1.93
0 0.82** 2.13 0.59 1.52 373
1 0.45 0.63 0.31 0.43
2 0.92*** 3.01 0.85 2.60
3 0.58 1.88 0.68 2.27
4 −1.47 −1.52 −1.59 −1.63
Table II.
5 1.95 1.94 1.90 1.87 Average daily
Notes: This table shows the abnormal returns (ARs) for the sample of 109 cash dividend increase abnormal returns
announcements for 11 trading-days around the dividend announcement date (t ¼ 0) using both the market around dividend
model and the market adjusted return. t-statistics are for the null hypothesis that the average abnormal return increase
is equal to zero. **,***Significant at 5 and 1 percent levels, respectively announcements

In the days preceding the dividend increase announcement, the average abnormal return is
positive on three occasions, but statistically significant only on day −1 (AR ¼ 0.68 percent,
t-statistic ¼ 2.22). The presence of significant positive abnormal returns on day −1 shows an
earlier market response to dividend announcements, suggesting that there is some
information leakage into the market before the actual announcement of cash dividends.
During the post-announcement period, significant positive abnormal return is reported on
day +2, which implies that there is a delayed response from the market as stock prices
adjust slowly to the new information emanating from dividend announcement. The results
documented using the market-adjusted returns are similar to those reported using the
market model.

5.2 Share price reaction to dividend decrease announcements

Table III reports the stock price response to dividend decrease announcements. The
literature suggests that in a world of information asymmetry, an announcement of a
reduction in dividend may convey a pessimistic message about management’s assessment
of the future prospects of the firm (Ross, 1977; Bhattacharya, 1980; Miller and Rock, 1985;

Days AR (market model) t-statistics AR (market-adjusted return) t-statistics

−5 0.54 1.85 0.47 1.55

−4 0.18 0.56 0.25 0.81
−3 −0.13 −0.39 −0.20 −0.64
−2 −0.69 −1.54 −0.77 −1.77
−1 −0.70** −2.29 −0.87 −2.80
0 −1.91*** −2.56 −1.88 −2.55
1 −0.81* −1.72 −0.75 −1.63
2 −0.75* −1.93 −0.63 −1.72
3 −0.34 −1.01 −0.38 −1.08
4 −2.24 −1.36 −2.23 −1.35
Table III.
5 1.42 0.84 1.29 0.76
Average daily
Notes: This table shows the abnormal returns (ARs) for the sample of 87 cash dividend decrease abnormal returns
announcements for 11 trading-days around the dividend announcement date (t ¼ 0) using the market model around dividend
and the market adjusted return. t-statistics are for the null hypothesis that the average abnormal return is decrease
equal to zero. *,**,***Significant at 10, 5 and 1 percent levels, respectively announcements
MF Lonie et al., 1996; Gupta et al., 2012). In response to such a signal, the signaling hypothesis
45,3 predicts that the stock market would react negatively, resulting in a fall in stock price of the
dividend-decreasing companies. The results of this study support this assertion in the
Nigerian context.
The results show that investors who hold these companies’ stocks, on average,
experienced negative abnormal returns during the event period. Specifically, the sample of
374 companies announcing a reduction in dividends earned a significant negative abnormal
return of −1.91 percent, with a t-statistic of −2.56 on the dividend announcement date
(day 0). The negative stock price reaction is consistent with the hypothesis that dividend
decreases convey negative information to the market about the firm’s prospects. The result
also confirmed the findings of previous studies, which suggests that the market’s adverse
reaction to a dividend cut is much larger in absolute magnitude than those of dividend
increases (Petit, 1972; Charest, 1978; Aharony and Swary, 1980; Lonie et al., 1996).
In the days prior to the dividend announcement, the dividend-decreasing companies
earned a significant negative abnormal return of −0.70 percent (t-statistics ¼ −2.29) on day
−1. Once again, this result suggests that the market reacts before the cash dividend
announcement. Similarly, investors experienced significant negative abnormal returns
of −0.81 and −0.75 percent on day +1 and day +2 (t-statistics ¼ −1.72 and −1.93,
respectively). The presence of significant negative abnormal returns in the
post-announcement period suggests that the market takes time to fully assimilate the
news contained in dividend announcement into stock prices. These results are at odds with
those reported in previous studies, where the markets react quickly and efficiently to
corporate news contained in dividend announcements (Petit, 1972; McCluskey et al., 2006;
Dasilas and Leventis, 2011). The results from the market-adjusted return model are similar
to those reported using the market model.

5.3 Share price reaction to no change in dividend announcements

Table IV shows the stock price response to no change in dividend announcements. The
literature suggests that the announcement of a no change in dividend do not provide any
additional news to the market, and as such no abnormal returns would be earned on the
dividend announcement day. In other words, only normal returns are expected on the dividend
announcement day as no new information is being disclosed to the market. The results of this
study are consistent with the suggestion in the literature.

Days AR (market model) t-statistics AR (market-adjusted return) t-statistics

−5 0.21 0.60 0.34 0.89

−4 −0.12 −0.33 −0.02 −0.02
−3 0.23 0.69 0.17 0.53
−2 0.06 0.15 −0.14 −0.37
−1 0.27 0.78 −0.08 0.24
0 0.21 0.46 0.01 0.03
1 −0.25 −0.47 −0.24 −0.46
2 −0.24 −0.56 −0.19 −0.48
3 −0.14 −0.39 −0.35 −0.89
4 0.49 1.44 0.21 0.57
Table IV.
5 0.01 0.02 −0.18 −0.47
Average daily
abnormal returns Notes: This table shows the abnormal returns (ARs) for the sample of 56 no change in dividends
around dividend announcements for 11 trading-days around the dividend announcement date (t ¼ 0) using the market model
no change and the market adjusted return. t-statistics are for the null hypothesis that the average abnormal return is
announcements equal to zero
The results show that there is an insignificant market reactions on the five days preceding Stock market
the dividend announcement day. The results are also the same in the five days following the reaction to
dividend announcement day. These results suggest that when the dividend payment level is cash dividends
not altered, dividends do not signal any new information to the market. Although investors
who hold these companies’ stock earned an average abnormal return of 0.27 percent
(t-statistic ¼ 0.46) on the dividend announcement day (day 0), this figure is not statistically
significant at any conventional level. The presence of statistically insignificant average 375
abnormal return on the dividend announcement day supports the hypothesis that constant
dividends are only associated with normal stock returns. This finding corroborates the
results of earlier studies in this area (Bajaj and Vijh, 1990; Al-Yahyaee et al., 2011; Dasilas
and Leventis, 2011). However, the positive sign on the dividend announcement day
contrasts with the results reported in Oman by Al-Yahyaee et al. (2011), but is consistent
with those documented in the USA by Bajaj and Vijh (1990). Similar to the market model,
there is an insignificant market reaction to no change in dividends using the market-
adjusted return model.

5.4 Cumulative abnormal returns

We also calculate the cumulative average abnormal returns (CARs) for different intervals.
The null hypothesis to be tested is that the cumulative average abnormal returns will be
equal to zero. The test statistic is the ratio of the cumulative average abnormal return to its
standard error. Table V reports the cumulative abnormal returns.
Looking at the wealth effect surrounding cash dividend announcements, the results
show that the market seems to consider dividend increases as good news. The two-day
event window (−1, 0) reveals a significant positive wealth effect surrounding an increase in
cash dividend announcements. For the whole event window (+5, −5), the CARs are positive
and significant. For the event window that precedes the announcement date (−5, −1), the
CARs are positive, but statistically insignificant. On the other hand, the event window
following the dividend announcement (+1, +5) shows that the CARs are positive and
significant. The deductions using CARs from the market-adjusted return model are
consistent with those from the market model.
For the sample companies which decrease dividends, the two-day event window (−1, 0)
shows a significant negative reaction to dividend decreases. For the whole event window
(+5, −5), the CARs are negative and statistically significant. The CARs are also negative
and significant in the following event windows: (+1, +5), (−1, +1), and (0, +1). This finding
is consistent with the hypothesis that dividend decreases conveys negative information to
the market resulting in share price drop. These results are similar whether we use the
market model or the market-adjusted return model.

Dividend increase Dividend decrease No change in dividends

Market Market-adjusted Market Market-adjusted Market Market-adjusted
Days model return model return model return

(+5, −5) 3.97*** (2.74) 3.37 (2.32) 5.42*** (−4.16) −5.70 (−4.61) 0.73 (0.44) −0.30 (−0.19)
(−5, −1) 0.71 (0.78) 0.62 (0.70) −0.79 (−0.82) −1.11 (−1.24) 0.65 (0.62) 0.46 (0.45)
(+1, +5) 2.43** (2.31) 2.16 (2.05) −2.72*** (−2.61) −2.70 (−2.58) −0.13 (−0.12) −0.78 (−0.69)
(−1, +1) 1.95 (2.17) 1.52 (1.63) −3.41*** (−5.47) −3.50 (−5.67) 0.23 (0.27) −0.15 (−0.17)
(−1, 0) 1.50*** (2.80) 1.20 (2.26) −2.61*** (−3.11) −2.75 (−3.30) 0.48 (0.75) 0.10 (0.14) Table V.
(0, +1) 1.27 (1.56) 0.90 (1.07) −2.71*** (−5.09) −2.63 (−5.03) −0.04 (−0.05) −0.23 (−0.29) Cumulative abnormal
Notes: This table reports the cumulative abnormal returns (CAR) for dividend increase, dividend decrease returns for dividend
and no change in dividends using the market model and the market-adjusted return. t-statistics are for the increase, dividend
null hypothesis that the cumulative average abnormal returns are equal to zero. t-statistics are reported in decrease, and no
parentheses. **,***Significant at 5 and 1 percent levels, respectively change in dividends
MF For the companies that did not change their dividend payment level, the results show that
45,3 the CARs are insignificant in all event windows examined, using both the market model and
the market-adjusted return. This finding is consistent with the notion that announcements
of a no change in dividends do not convey any new information to the market, resulting in
insignificant market reaction.

376 5.5 Interaction effect between dividends and earnings signals

We also consider the earnings information disclosed by the firms in our sample. Cash
dividends in Nigeria are announced concurrently with earnings during the financial year-
end for companies listed on the stock exchange. As a result, a potential occurrence of
significant abnormal returns could be attributed to both announcements (Kane et al., 1984;
Lonie et al., 1996). To disentangle the importance of the dividend component of the
joint signal, we follow Amihud and Murgia (1997) and Al-Yahyaee et al. (2011) and regress
the announcement abnormal returns against both dividend changes (ΔDIV ) and
earnings changes (ΔEPS) relative to stock price (P). Table VI presents the results from
the regression.
The results show that there is a significant interaction effect between the dividends and
earnings signal, which suggests that both dividends and earnings jointly explain the
abnormal return on the dividend announcement day. The adjusted R2 of the model is
12 percent and the F-statistic is significant at the 1 percent level[6]. There are no significant
differences between response coefficients of dividend increases and decreases. As in
Amihud and Murgia (1997) and Al-Yahyaee et al. (2011), changes in dividends
result in significant positive reaction in stock prices beyond the effect of the information
contained in earnings changes. It should be noted that the test relates to the abnormal return
on dividend announcement date. We do not estimate the earnings announcement return.

6. Conclusion
This paper empirically investigates the impact of cash dividends on stock prices of a sample
of firms listed on the Nigerian stock market. While there is a surfeit of empirical studies on
the stock market reaction to dividend announcements in the US and other developed
markets, this paper is one of the few investigations of this topic in emerging markets. It is
the first study on the Nigerian stock market reaction to cash dividends occurring without
other corporate events (such as interim dividends, stock splits, stock dividends, mergers and
acquisitions) during the event study period. In addition, the Nigerian capital market
presents a unique case in the study of corporate dividend policy. First, dividends are tax
disadvantaged in Nigeria, which can make dividends informative of company’s future

Variable Coefficient t-statistic

Constant 0.04*** 2.23

ΔDIV/P 0.68** 4.56
ΔEPS/P 0.23** 3.28
Adjusted R2 0.12
F-value 28.70
Table VI.
Observations 162
Regression results of
abnormal returns on Notes: This table reports the results of the regression of abnormal returns (based on market model) on both
dividend changes and the changes in dividends and changes in earnings relative to stock price ten days before the dividend
earnings changes announcement day. t-statistics are significant are heteroscedastic consistent (White, 1980). **,***Significant
relative to stock price at 5 and 1 percent levels, respectively
prospects and cash flow. Second, there is high ownership concentration and low shareholder Stock market
protection in Nigeria, implying that minority shareholders may rely on the dividend as a reaction to
signal in Nigeria. Third, Nigerian companies rely heavily on bank financing, which may cash dividends
reduce the announcement effect of dividends on stock prices. Finally, there are weak
corporate governance practices and limited access to information by shareholders, which
suggests that dividends may be an important piece of information with which investors can
value stocks in Nigeria. 377
Our results lend empirical support to the information content of dividend announcements
and the proposition which states that stock price changes follow dividend changes in the same
direction. That is, dividend increases are associated with positive stock price reaction, while
dividend decreases are associated with negative stock price reaction. Companies that do not
change their dividends reported insignificantly positive average abnormal returns. These
results are consistent with the tax-based signaling models which predict that the higher taxes
on dividends relative to capital gains make dividends informative. Similar to Al-Yahyaee et al.
(2011), the evidence from the Nigerian stock market suggests that the signaling effect of
dividends is not restricted to the developed stock markets, but also prominent in emerging
markets with different institutional environment.
Our results also lend support to the interaction effect of concurrent announcements of
dividends and earnings on stock prices. That is, both dividends and earnings jointly
explain the abnormal return on the dividend announcement day. In contrast to the
findings of a UK-based study by Lonie et al. (1996), the evidence from the Nigerian stock
market shows that dividend announcements have greater impacts on stock prices than did
earnings announcement.
In terms of the limitation of this study, the small number of firm-year observations is an
issue. This issue is, however, partly caused by the restriction of the sample to cash dividend
announcements made without other corporate events such as stock splits, interim dividends,
stock dividends, and mergers and acquisitions, and partly a consequence of examining price
movements on smaller stock markets. Given the growing popularity of stock dividends in
recent years in Nigeria, future research should examine the stock market reaction to stock
dividend announcements in Nigeria.

Notes
1. In Nigeria, any company paying dividends to its shareholders is first of all obliged to pay tax on its
profits at the company’s tax rate before distributing dividends to its shareholders. As a general
rule, any dividend made by a Nigerian company is liable to a withholding tax at source of
10 percent. This rate may be reduced to 7.5 percent if the foreign company is resident in a country
with which Nigeria has a double tax treaty.
2. The examination period (2008–2012) was chosen because this time span coincided with spells of
recession, recovery and boom in the Nigerian economy. As a result, the results of this study are not
specific to any one stage in the business cycle, but reflective of all economic conditions.
3. The financial papers include Financial Times and Business Day while the databases are the
Nigerian Stock Exchange (NSE) database, Peace Capital Market database and Cash Craft Asset
Management database.
4. The market-adjusted return model can be viewed as a restricted market model with α equal to
0 and β equal to 1 for each stock (see Mackinlay, 1997). Since this is a highly unrealistic constant
expected returns formulation, the results from the market-adjusted return model should be
considered with extreme caution.
5. To save space, we report condensed tables that present results from −5 to +5 days.
6. Earnings data for our sample are available for 162 cases: 98 cases of dividend increases and
64 cases of dividend decreases.
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Corresponding author
Friday Kennedy Ozo can be contacted at: profkennedyozo@gmail.com

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