Abstract
This paper applies GARCH (p, q) model and non-parametric Run test for studying isolated events of dividend change announcements covering a period of ten years for capturing abnormal returns in the Indian Stock Market using an event window of 61 days. The results indicate that there is no signalling effect of ‘dividend increase/decrease along with financial results announcement’ event on the share price of companies. Cumulative abnormal return tendency is observed if share purchase is made prior to any of the events. It is also found that adjustment in prices after event date takes place with a substantial time lag reflecting inefficiencies in the market. Keywords: Signalling effect; market efficiency; dividend announcement; event study; emerging economy
Highlights
Examining financial market reaction to various firms specific and market specific events has been the subject matter of numerous studies
We propose following hypothesis for testing: H0 1: The dividend increase/decrease announcement made along with declaration of financial results is not associated with subsequent change in share price
Our approach through the use of aggregated data on event dividend increase/decrease along with financial results announcement over ten year period does not support any significant impact of dividend increase/decrease along with financial results disclosure on the share price of listed companies in India
Summary
Examining financial market reaction to various firms specific and market specific events has been the subject matter of numerous studies. Based on the initial work of Louis Bachelor (1900) that securities price behave randomly, Lintner (1956) proposed a model of asymmetric information and related relevance of dividend payment to earnings performance of the firms. He argued that firms increase dividend payments when they are positively confident of future performance, but are reluctant to decrease dividend payment unless they are convinced of permanent decline of firm’s future performance. The theory of signalling effect became relevant to determine whether firms signal their performance through dividend change announcement. Fama et al (1969) analysed stock price behaviour by using event study method to convey that markets are efficient and the share prices incorporate all available information. Ross (1977), Bhattacharya (1979), John and Williams (1985), Miller & Rock (1985) focused on share price behaviour and argued that managers use different types of information including dividend related to convey change in value perception of the firm
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