An Evaluation of the Information Efficiency of the Nairobi Stock Exchange

Abstract

The overall purpose of this study was to test the efficiency of the Nairobi Stock Exchange (NSE) with regard to its reaction to dividend announcements in terms of adjustments of prices for shares listed at the NSE. The hypothesis of the study was that the NSE, a typical African developing stock market, is not efficient with respect to dividends information releases into the market. The assessment of the market response to information was done using event study methodology. The study covered 15 dividends announcements made during the year 2003. To determine the market response to dividends the researcher calculated the abnormal returns and the cumulative abnormal returns for samples for the 61 day event. window. The results revealed that there were abnormal returns and cumulative abnormal returns that were significant for 27 days before and 30 days after dividend amount (information leakage). The market response continues drifting up or down beyond the announced date (slow) response). This is inconsistent with the efficient market theory. The conclusion is that the Nairobi Stock Exchange was inefficient with respect to dividend announcements in the year 2003. These results may reflect a variety of factors that influence the processing of new information such as insider trading, price limits, poor information dissemination, information asymmetry, limited analytical and investigative capabilities and long transaction settlement period. The reflection on the efficient market hypothesis implies that addressing issues of research capacity, discouragement of insider abuse, encouraging timely disclosure and dissemination of information and improving trade mechanism are the key elements of a strategy aimed at promoting the development of the Nairobi Stock Exchange.