Can dividend announcement predict abnormal returns? Tunisia evidence

Abstract

Purpose – The purpose of this paper is to observe whether the announcement of dividend distribution can affect the abnormal return on the Tunisian stock exchange. Design/methodology/approach – The sample includes 24 non-financial listed stocks in Tunisia Stock Exchange during the years 2004-2013. Company decides to announce its dividend payout policy to signal the market that the firm is now processing future prospects, which will result in changing its stock prices. Findings – The findings yield qualitatively consistent with the previous research. After controlling for the effect of the Politic Crisis in Tunisia during 2010-2013, the result shows that the stock prices move upward significantly after dividend announcements. Abnormal return (AR) and cumulative abnormal return (CAR) from the market model are statistically significantly revealed. Moreover, most event windows show that the stock return becomes lower when the investor sentiment for dividend is higher. Research limitations/implications – The result is limited to the absence of an important number of firms listed in TSE from this period. Practical implications – Investors in Tunisia show their preference for dividend to self-control, satisfaction and increase their profit. “This could be the catering incentive of the firm to decide to pay dividends”. Originality/value – This document provides evidence of Baker and Wurgler's (2002) proposed a new dividend theory; dividend catering theory, Bulan et al (2004) proposed the timing of dividend initiation, Thanwarat Suwanna (2012) document the impact of dividend announcement on stock returns. Even though the results indicate that Tunisian market react to the announcement of dividend by managers. Moreover, the timing of dividend initiation is affected by the investors’ sentiment, measured by the dividend premium. Tunisian investors react positively to the announcement to distribute dividend from firms especially in abnormal economic situation explained by the Tunisian politic crisis.