Capital market efficiency and the effects of dividend announcements on share prices in Nigeria

An efficient market is one in which prices fully reflect available information. An implication of an efficient market is that no excess returns can be made from this information because current prices already reflect the information. However, excess returns (if any) should not be statistically significant from zero (Fox and Opong, 1999). The overall aim of this study is to test if the Nigerian stock market efficiently reacts to dividend announcements in price adjustments. This study extends and improves on previous studies by assessing the speed with which share prices adjust to the information contained in dividend announcements using daily data on the Nigerian stock market. The total number of announcements examined in the Notice to Dealing Members' File of the Nigerian Stock Exchange from 1991 to 1999 totalled 990. The study covered only 595 cases of annual dividend announcements during this period. To determine the short-run reactions to dividend, the author calculated market adjusted buy-and-hold returns for the samples for the three-day event period (that is from the day before the announcements to the day after), for the 21-day and 61-day event windows. The results revealed that there were excess returns and the cumulative excess returns were significant for 30 days before and until 25 days after dividend announcements for dividend paying firms. It points to the fact that the Nigerian stock market is not semi-strong efficient.