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Journal of Advance in Social Science and Humanities ISSN: 2395-6542

CrossRef DOI: http://dx.doi.org/10.15520/jassh35224.

A Study on the Impact of Dividend Announcement on Stock Price

Amit Balkrishna Joshi1, Dr. Manas Mayur2


1
Student of Goa Institute of Management, Goa.
2
Faculty at Goa Institute of Management, Goa.

Accepted 2017-05-12; Published 2017-06-05

A
bstract: Dividend announcements are always a matter of concern for the investors to make investment
decisions in equity of any company, as it is a major component for maximizing the wealth of
shareholders. This paper examines the share price reactions of top 20 PSU (Public sector units)
companies by market capitalization listed in Bombay Stock Exchange (BSE), surrounding 20 days
of announcement (-10 days to +10 days) during the year 2013-2016. The findings suggest that there is a
significant difference in the impact of dividend announcements in pre and post announcement period on the
share prices of the selected companies. Hence, investors are advised to follow dividend decisions of the
companies ardently in order to make wiser investment decisions.

Keywords: Investment, Shareholders, Bombay Stock Exchange, Companies, Ardently.

Introduction
market price of the shares are positively or
Stock market is said to be the barometer of an negatively affected by the dividend announcements
economy and thus its behaviour is under constant made by the companies.
observation. Stock indices are the combination of Any announcement of changes in corporate finance
representative factors like companies and sectors variables like dividends in an uncertain economic
which play a vital role in growth and development environment are very often regarded as signals sent
of the sector. Many economic and non-economic by the company management to be interpreted by
factors affect the movement of the indices and the outside investors. Numerous models for
events. The growing linkages of national markets interpreting such signals have been developed to
in currency, commodity and stock with world explain the share price reaction to such
markets and existence of common players create announcements. One such model is Event
volatility in the market averse. An understanding of methodology study. It has been used to investigate
the market volatility is important from the the semi-strong form of market efficiency.
regulatory policy perspective. An investor aims to Information disclosures related to mergers and
maximize the return and minimize the risk (losses) acquisitions, stock repurchase announcements,
in the stock market. A company's liquidity in the dividends and earnings announcements and
present market can be determined by the dividend macroeconomic variables etc., have been
announcements made by the company. One of the investigated to test the semi-strong form market
most meaningful events for research is dividend efficiency in a number of studies. Dividend
announcements. In simple terms dividend is the announcements, whether a surprise or an increase
cost of equity capital to equity shareholders. Equity to an already existing dividend, are one of the most
investors look upon dividend announcements as the common actions firms take in order to attract new
Manas Mayur. A Study on the Impact of Dividend Announcement on Stock Price

investors. These announcements by firms are share prices both in pre dividend and post dividend
usually seen as a sign of strength, suggesting that period as market passes through regular and
the firm has a substantial amount of excess capital. continuous revision of directives of regulators to
The present study provides an empirical evidence check a bullish market.
of the market's reaction to dividend
announcements. It provides an opportunity to The results of study conducted by Sultan & Kumari
understand the markets' assessment of dividend [5] indicate that Average Abnormal Returns are not
payments, thus facilitating a better understanding found significant on event day during any period of
of the dividend policies of Indian companies. The dividend announcements. The results of paired t-
present study is important for investors, regulators, test for means have shown that there are significant
and management. differences in average number of transactions
before and after announcement from 2006 to 2010.
Literature Review On the other hand, the results of the paired t-test for
means have shown mixed results for turnover and
Dividend is considered as an important facet of average traded quantity during the period under
organisation’s financing decision and has attracted study.
the researchers all over the world to find its
underlying secrets. Despite a lot of research been Thanwarat’s [6] research result indicates that the
undertaken in this field, yet till now, no conclusive stock prices move upward significantly after
answer is there as to the reasons behind dividend dividend announcements. Abnormal return (AR)
distribution and its impact. There is abundant and cumulative abnormal return (CAR) from the
literature that has examined market reaction to market model are statistically significantly
dividend announcements. And majority of the revealed. The results confirm dividend signalling
studies have concluded the presence of a positive theory as the dividend announcements have
association between announced changes in significant impact on share prices.
dividend policy and stock price movements. Dinh, Nguyen [7] results clearly show that the
effect of dividend announcement on the stock
Neetu & Shuchi [1] found that Investors do not gain return is positive around the announcement date. In
significant value in the period preceding as well as addition, the stock price moves up as long as the
on the dividend announcement day, yet they can ex-dividend date approaches and then starts
gain value in the post announcement period. The decreasing from this date onwards.
evidence nevertheless shows that dividend
increases lead more positive abnormal returns, Abdullah [8] found that the empirical estimation
supporting the Efficient Market Hypothesis. based on the Fixed Effect and Random Effect
Model show significant negative relation between
Subhendu [2] found that there is a rise price after Dividend Yield and Stock Price while Retention
result but that rise in price is mainly due to market Ratio has a negative but statistically insignificant
conditions rather than dividend. The increase or relationship with Stock Market Prices.
decrease in share price is not reflecting the amount
of dividend. The CAR is positive in the long run Olatundun [9] finds that the cumulative excess
after dividend announcement. returns (CERs) for dividend paying firms are
positive and significant for 30 days from the day of
The study of Shaveta et. al. [3] exposed the fact that the announcement, while the CERs for dividend
stock prices do react positively to increase in omitting firms for the same period are significant
dividend announcements. Dividend and negative. The CERs for the subsamples are
announcements do possess signalling property. statistically significant around the event window.
Overall, this provides evidence that the Nigerian
Abdullahil, Nazamul, Abdullah [4] found that stock market is not semi–strong efficient, that
dividend declaration does not bring any gain to the dividend policy matters and that share prices do
investors; rather they lose due to substantial fall in react to dividend announcements.

Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May 2017 35048
Manas Mayur. A Study on the Impact of Dividend Announcement on Stock Price

Nikunj, Kalpesh [10] found that there is no increases the prices. "Neutral" news does not affect
occurrence of significant AARs on event day the value of the companies. These results correlate
during any period of dividend announcement under with the theory of dividend irrelevance Modigliani
study, whereas CAARs has been found significant and Miller, according to which the company first
on event period 57 times positive move, 49 times prefer to implement investment projects. Payment
negative move and 64 times constant or near to zero of dividends indicates the absence of such projects.
volatility found. The results of paired t-test for Thus, investors consider dividend payments rather
means have shown that there are significant as the evidence that the company has no profitable
differences in average number of transactions investment projects, than as the evidence of its
between before and after announcement during the stability and investment appeal.
period 2008 to 2011 for the companies HUL, ITC,
Jaiprakash, L & T, Reliance Industry, SBI, Tata
Motor, and Wipro. Need for the study

Anjali, Guntur [11] paper finds that despite of The dividend-signalling hypothesis is one of the
investors do not gain significant value in the period key issues of the field of corporate finance; perhaps
preceding as well as on the dividend announcement no other area of finance has been subject to so much
day, yet they can gain value in the post empirical investigation during the last five decades
announcement period. Investors do shift their as the behaviour of stock prices in relation to
security positions at the time of dividend dividend announcement. Therefore, an attempt has
announcement, which indicate that in post been made to review previous studies conducted in
announcement period there is a possibility of developed countries of the world as well as in
information content in dividend announcement in emerging markets. However, very little research
BSE. efforts have been made so far on the dividend
behaviour of PSU (Public Sector Undertakings)
Sukhjeet, Ravi [12], the findings suggest that there sector. In this paper I’ll examine share price
is a significant difference in the impact of dividend reactions of PSU companies listed in BSE,
announcements in pre and post announcement surrounding 20 days of announcement (-10 days to
period on the share prices of the selected +10 days) during the year 2013-2016.
companies. Hence, investors are advised to follow
dividend decisions of the companies ardently in
order to make wiser investment decisions. Hypothesis
To achieve the above stated objectives, the
Douglas, Bacon [13] - Evidence here supports the following hypotheses have been formulated for the
positive signal associated with the sample of proposed study:
increased dividend announcements examined. H0 – There is no significant difference of pre and
Likewise, the study results support the semi-strong post announcement of dividend on stock price
form efficient market hypothesis. returns.
H1: There is significant difference of pre and post
Shirin, Kavita [14] findings show that there is an announcement of dividend on stock price returns.
increase in the share price and has resulted in
positive average abnormal return especially in the Research Methodology
post dividend declaration period in Oman context.
The study focuses to investigate the impact of
Galina, Elena [15] research revealed that the dividend announcement by examining the reaction
market reaction to the announcements of dividend of stock price to dividend announcements using
payments looks inversely to type of the news, that event study methodology to explore stock returns
is, an increase in dividends negatively affects around the dividend announcement date. Event
shares prices and reduces the market value of the study studies the behaviour of firms’ stock price
company. Decrease in dividends, on the contrary, around corporate or economic events such as

Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May 2017 35049
Manas Mayur. A Study on the Impact of Dividend Announcement on Stock Price

dividend announcements. In the academic


accounting and finance field, event studies have Methodology
been applied to a variety of firm specific and
economies wide events. In most applications, the An event study is a test that attempts to measure the
focus is the effect of an event on the price of a valuation effects of a corporate event, such as
particular class of firms’ share. Some examples as merger, earnings announcement or dividend
earning announcement, mergers and acquisitions, announcement, by examining the response of the
issues of new equity or debt and dividend stock price around the announcement of the event.
announcement which is the study in this paper. An The timeline for a typical event study is shown
event study describes a technique of empirical below in event time:
financial research that permits an observer to
evaluate the impact of a particular event on a stock
price like dividend announcement and stock return.
T-10 … T-3 T-2 T-1 0 T+1 T+2 T+3 T+10
Sample

Moreover, to study the impact of dividend • The interval T-10 to T+10 is the event
announcements, this paper will examine share price window
reactions of top 20 PSU (Public sector units) • Time 0 is the event date in calendar time
companies by market capitalization listed in
Bombay Stock Exchange (BSE), surrounding 20 Ø Event window: We use data from this time
days of announcement (-10 days to +10 days) period, in conjunction with the ∝ and the 𝛽 of
during the year 2013-2016. The event date is the the stock or stocks to determine:
dividend announcement date, when the board of - Whether the event announcement was
directors has proposed the dividend proposal, is anticipated or leaked.
defined as t= 0, the time window is the estimation - The “post announcement” effect: how long it
period and event period is the time period over took for the event information to be absorbed by
which the share prices of the firms are involved. the market.
The interest period is prior and after the event date In this paper event window is of 20 days.
to capture the price effect of announcements which
occur after stock market closes on the
announcement day. This paper uses a time period Event Study Methodology
of -10 to +10.

• Significance testing
Data Source
-Do the Average Returns indicate that the event
The historical stock prices and the dividend had a real effect on the price of the firm’s stock?
announcement data have been taken from the -For analysis, using the standard α = 0.05 cutoff,
websites www.bseindia.com and the null hypothesis is rejected when p < .05 and
www.moneycontrol.com respectively. not rejected when p > .05.

Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May 2017 35050
Manas Mayur. A Study on the Impact of Dividend Announcement on Stock Price

Table 1: Top 20 PSU Companies by Market Capitalization


SL Scrip Code Company Name Market Cap (Crs)
1 500312 ONGC 258717
2 500112 SBI 205519.52
3 533278 Coal India 178897.53
4 530965 IOC 143953.3
5 532555 NTPC 131886.2
6 532898 Power Grid 96339.72
7 500547 BPCL 87543.81
8 532155 GAIL 52654.5
9 500104 HPCL 43210.53
10 526371 NMDC 40339.6
11 532134 BOB 36774.39
12 533098 NHPC 33150.5
13 532810 PFC 33106.17
14 500049 BEL 32293.79
15 500103 BHEL 30056.53
16 533106 OIL 26407.9
17 532955 REC 25466.57
18 531344 Container Corporation 21232.69
19 532483 Canara Bank 16,276.16
20 532885 Central Bank of India 15,816.55

Table 2: Summary of the observations


Variable Observations Mean Std. Dev. Min Max
t-10 56 1.193519 3.131533 -4.4831 17.95
t-9 56 0.7864703 2.177474 -3.4025 8.7
t-8 56 1.011318 3.571914 -3.8598 16.1255
t-7 56 -0.200413 2.164273 -6.05 6.45833
t-6 56 0.3748093 3.12424 -4.6254 13.341
t-5 56 -0.43364 2.627791 -9.3 10.9414
t-4 56 -0.059255 2.095638 -4.6557 5.45
t-3 56 -0.234717 2.339374 -4.9817 9.7
t-2 56 -0.496479 2.548799 -12.95 6.06768
t-1 56 0.1086043 2.947373 -6.4454 16.75
t 56 -0.20049 3.408069 -4.8706 16.1986
t+1 56 0.0569609 4.756038 -7.3801 25.6
t+2 56 0.2488374 2.895126 -4.335 9.45
t+3 56 -0.861019 2.694107 -9.8 5.15548
t+4 56 -0.474673 2.386279 -7.65 7.83308
t+5 56 0.5956095 4.14811 -6.24 26.25
t+6 56 0.1249147 2.445848 -8.7 8.92019
t+7 56 -0.501201 3.372553 -14 9.893
t+8 56 -0.699736 2.448141 -4.1009 10.25
t+9 56 -0.955378 2.469379 -7.1429 6.5526
t+10 56 -0.949708 2.473813 -4.8 7.17671

Table 2 shows that there is negative average return on the day of the dividend announcement whereas there is
positive average return one day prior and two days after the announcement of dividend.

Empirical Study Results The same were concentrated for 20 days event
window comprising 10 days prior/ post to dividend
The findings in this study are obtained in terms of announcement.
the event study methodology in which the
abnormal return of company with a view to study One Sample t-test
the impact of dividend announcement. In order to A t-test helps you compare whether two groups
investigate the occurrence of Average return have different average values. The t-test’s
centric to dividend announcement date were statistical significance and the t-test’s effect
obtained for sample stocks for the study period. size are the two primary outputs of the t-

Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May 2017 35051
Manas Mayur. A Study on the Impact of Dividend Announcement on Stock Price

test. Statistical significance indicates whether the The “One Sample T-Test” is similar to the
difference between sample averages is likely to “Independent Samples T-Test” except it is used to
represent an actual difference between populations compare one group’s average value to a single
(as in the example above), and the effect size number.
indicates whether that difference is large enough to
be practically meaningful.

Table 3: One sample t-test results


Pre-Announcement Post-Announcement
Average Average
Days Return t-test p-value Days Return t-test p-value
-10 1.193519 2.8521 0.0061 0 -0.2004903 -0.4402 0.6615
-9 0.7864703 2.7029 0.0091 1 0.0569609 0.0896 0.9289
-8 1.011318 2.1188 0.0386 2 0.2488374 0.6432 0.5228
-7 -0.2004125 -0.693 0.4913 3 -0.8610188 -2.3916 0.0202
-6 0.3748093 0.8978 0.3732 4 -0.4746727 -1.4886 0.1423
-5 -0.4336404 -1.2349 0.2221 5 0.5956095 1.0745 0.2873
-4 -0.0592552 -0.2116 0.8332 6 0.1249147 0.3822 0.7038
-3 -0.2347166 -0.7508 0.456 7 -0.5012008 -1.1121 0.2709
-2 -0.4964793 -1.4577 0.1506 8 -0.6997358 -2.1389 0.0369
-1 0.1086043 0.2757 0.7838 9 -0.9553778 -2.8952 0.0054
0 -0.2004903 -0.4402 0.6615 10 -0.9497078 -2.8729 0.0058

Figure 1: Average return and p-value during the event window

One Sample t-test


1.2
1
0.8
A 0.6
R
v
e 0.4
e
t 0.2 Average Return
r
u 0
a p value
10
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9

r -0.2
g
n
e -0.4
-0.6
-0.8
-1
Day

Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May 2017 35052
Manas Mayur. A Study on the Impact of Dividend Announcement on Stock Price

date and the stock price moves up as long as the ex-


Table 3 and Figure 1 depicts that the first 3 days of dividend date approaches and then starts
the pre-announcement window have positive decreasing from this date onwards.
average return, where the first two are statistically
significant at 1 percent and the third is at 5 percent.
But as the dividend announcement day gets closer, Two sample t-test
the average return turns negative except for the The “paired t-test” is used when each observation
previous day of the announcement where the in one group is paired with a related observation in
average return turns positive, but statistically not the other group.
significant. Post announcement the returns are
positive for the first two days but are not Table 4: Two sample t-test results
statistically significant. The average returns are t-1 to t+1 t-1 to t+2 t-1 to t+3
negative for 6 days while they are positive for only t-test 0.0691 -0.254 1.8171
4 days. Out of the 6 negative average returns, 2 p value 0.9451 0.8 0.0719
values are statistically significant at more 1 percent
and 2 values at 5 percent. The positive returns are Table 4 depicts that the first 2 days post
not significant on any of the 4 days. announcement are not different compared to t-1
The observed results indicate that the investors day, whereas the third day post announcement is
perceive the announcement of stock dividends to be different compared to t-1 day i.e it is statistically
beneficial for them. Although the change of significant at near to 5 percent. This leads to the
positive reaction prior to the announcement day to conclusion that the null hypothesis of no significant
negative reaction after the announcement day difference of pre and post announcement of
indicates that the investors overreacted initially to dividend on stock price returns is rejected on the
these announcements, but a correction to this third day.
overreaction by the investors takes place quickly.
Such findings lead to the conclusion that the null
hypothesis of no significant difference of pre and Conclusion
post announcement of dividend on stock price
The stock dividends issue is like a puzzle in finance
returns is rejected.
that researchers have been trying to solve. The
present research work is also an effort in the same
The rationale for such results seems to be that the
direction. It has been conducted to capture market
information about the stock dividend
reaction, in terms of stock price and volume,
announcements reaches the investors prior to the
pertaining to stock dividend decisions in India.
decision date as it is mandatory for the issuing
The study shows that the announcement of stock
company to inform the exchange (where it is listed;
dividends induces an increase in the wealth of the
in this case, it is Bombay Stock Exchange) about
shareholders in India. The change of positive
the board meeting and the date of the board
reaction prior to the announcement day to negative
meeting. It has been observed that the companies
reaction after the announcement day indicates that
usually inform the exchange around seven days
the investors overreacted initially to these
prior to the day of the board meeting. In fact, most
announcements, but a correction to this
of the times the companies provide the agenda item
overreaction by the investors takes place quickly.
information along with the board meeting date to
The justification for such results seems to be that
the exchange. In such a situation, the moment this
the information about the stock dividends
information about the meeting and the agenda item
announcement reaches the investors prior to the
is given to the exchange, this becomes public
decision date as it is mandatory for the issuing
information and investors start reacting to it. This
company to inform the about the board meeting and
result is similar to the study of Dinh,Nguyen [7]
the date of the board meeting. It has been observed
where the effect of dividend announcement on the
that the companies usually inform the exchange
stock return is positive around the announcement
around five to seven days prior to the day of the

Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May 2017 35053
Manas Mayur. A Study on the Impact of Dividend Announcement on Stock Price

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