The Reaction Of Stock Prices To Dividend Announcement And Market Efficiency In Namibia

Abstract

Stock prices are generally found to be very sensitive to specific changes in a number of variables. For instance, information that may be released into the market unexpectedly could cause a reaction in stock prices of firms trading on a stock exchange. This is especially true when such specific information is vital to the economy.

When new information is released into the market, economic analysts might try to profit from it by taking advantage of the information asymmetry that may existent in the market.

Studies of market efficiency and the reaction of stock prices to divided announcements have seldom been conducted in Namibia. This study has therefore been conducted to bridge the gap that exists in literature with regard to the impact of dividend announcements and market efficiency on stock prices in the Namibian context.

The reaction of stock prices to dividend announcements and market efficiency in the Namibian Stock Market has been analysed in this study. Furthermore, the behaviour of stock prices from 2008 - 2011, using a sample of 12 out of 33 companies listed on the Namibian Stock Exchange was explored. The event study methodology (as implemented by Ball and Brown, 1968), was adopted in this study, which explores the reaction of stock prices before, during and after the event date -where the event date was defined to be the last day of trading.

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The results from the analysis have shown that stock prices react positively to the announcements of dividend information, especially a few days before the last day of trading. This was attributed to the fact that most investors normally try to dispose of the nonperforming shares and acquire those shares that show more promise to pay dividends at a later stage. Furthermore, only those investors who are in possession of dividend promising shares before the last day of trading will benefit from the dividend. The results of the analysis also show that stock prices tend to start rising beyond the event date. The rise is, however, a unique finding of the study, which was found to be contrary to what has been recorded in literature. Furthermore, the possible policy recommendation that were drawn from this study were that, the regulatory body should device more policies to help create a conducive environment for local companies ( more specifically Small and Medium Enterprises (SME‟s)) to participate on the Namibian Stock Exchange (NSX) so as to increase the number of local companies listed and also increase trade activities.