Dividend Signaling Hypothesis, Semi-strong form of Hypothesis and Market Capitalization Anomaly in Indian Stock Market

Abstract

The dividend signaling hypothesis means that dividend change announcements send signals to the market about its prospects. Market capitalization anomaly or size effect means small-cap stocks variances and returns are different than the large-cap stocks. The sample was tested for dividend change announcement, and the sample was divided into large, medium, and small sample sizes based on the market capitalization of the stocks to test the size effect. Event methodology market model used to calculate the abnormal returns on the dividend announcement day. We found that dividends send signals to the market, and the market reacts positively to the dividend change announcements on event day (Aharony and Swary 1980, Litzenberger and Ramaswamy 1982, Dhillon and Johnson 1994, Below and Johnson 1996), but results may vary with the size of the company. Small-cap companies' variances are higher than the large-cap and mid-cap companies, and also small-cap variances are not equal to other variances results similar to Wong (1989), Bandara and Samarakoon (2002), Sehgal and Tripathi (2006), and Switzer (2010). Finally, we concluded that the dividend signaling hypothesis and market capitalization or size effect anomaly exist in the Indian stock market