Dividend month premium in the Korean stock market

Bonha Koo,Joon Chae

doi:10.1108/jdqs-04-2020-0006

Abstract

The dividend month premium is the phenomenon that firms have abnormal returns in predicted dividend month. This study aims to examine the dividend month premium in the Korean stock market, using common stocks listed on the KOSPI and KOSDAQ from January 1999 to December 2016. Abnormal returns are estimated using the following asset price models: capital asset pricing model, Fama–French three-factor model and the Fama–French–Carhart four-factor model. This study finds positive abnormal returns in predicted dividend months, and even for the within-firm portfolio that buys stocks in the predicted dividend months and sells the same stocks in other months. The price impact and the subsequent reversals are greater with lower liquidity and higher dividend yield, implying that the price pressure from dividend-seeking investors affects this dividend month premium. In addition, the anomalies with the pre-declaration stock are smaller than the post-declaration stock, suggesting the necessity to improve the cash dividend policy of post-declaration for market efficiency.

Highlights

Korean investors have higher uncertainty in cash dividends compared to those in other countries such as the USA
If dividend payments are predictable using historical information, the abnormal return of predicted dividend months is a violation of efficient market hypothesis (EMH)
The prediction of dividend payment is important in Korea, because post-declaration procedures of cash dividends make dividend-seeking investors trade shares based on forecasts of dividend payments

Summary

Introduction

Korean investors have higher uncertainty in cash dividends compared to those in other countries such as the USA. This is because most cash dividends are to be declared ex post facto [1]. The dividend procedure of the firm whose settlement is at the end of December can be divided into pre-declaration [Figure (1a)] and post-declaration [Figure (1b)]. Investors can find out in advance whether dividends will be paid for the stocks and decide to trade those stocks before the ex-dividend date. Investors seeking benefits from dividends will buy the shares before the ex-dividend date, while those who are not will sell the shares beforehand. In post-declaration, as is the regular disclosure for cash

Objectives

Methods

Findings

Conclusion