The Impact of Dividend Payments on Stock Prices in a Developing Economy. The Case of Services Firms Listed on the Zimbabwe Stock Exchange, (2008 to 2012).

Abstract

The study aimed at providing a modern and concrete perspective on the role of dividends in Zimbabwe, a developing economy, by examining views regarding the role of the relevance of the conventional signaling theory. The objective of this study was to add to the knowledge body concerning stock price reactions at the dividend announcement and at the ex-dividend day. Data was collected through documentary review, questionnaires and interviews. The sample included finance executives, stock brokers and investors on the Zimbabwe Stock Exchange (ZSE). The chi-square, linear regression and correlation techniques were used in data analysis. The findings of the study show that 70% of the sampled firms take the dividend decision as an active decision variable due to the realization that dividend decisions influence firm value and because dividend policy decisions send messages to the market. A coefficient of 0.9707 indicates a strong positive relationship between dividend announcements and share prices. Share prices increase upon announcements. From the ex-dividend date share prices start to go down. However, this study failed to show that prices go down by an amount equivalent to the dividend paid. This paper therefore recommends that managers avoid dividend increases which may not be sustained by the future earnings. Further research may be conducted cutting across all sectors in the economy and over an extended period of time. Other efforts may be directed at investigating dividend policies in hyper-inflationary environments, or even dividend preference in an economy with high dividend taxation levels.

Keywords: Signaling Hypothesis, ex-dividend date, dividend announcement date, dividend preference.