Abstract
Corporate bond market is an important segment of financial market in terms of funds raised as well as potential for future growth though is sparsely researched. One of the two propositions on impact of dividend changes is signaling hypothesis (Bhattacharya, 1979) which suggests a positive effect on bond prices, on an announcement of dividend increase; whereas the other one is wealth transfer hypothesis (Handjinicolaou and Kalay, 1984) which proposes a negative impact on bond prices due to extortion of wealth from bond holders. By studying the impact of dividend policy decisions on Indian corporate bond prices, the paper examines these hypotheses and contributes to the literature on payout policy. Dividend increase and decrease announcements of 5% or more during a period of 5 years from year 1997-98 to 2001-02 have been identified and abnormal returns for bonds and stocks are computed. The analysis shows that abnormal bond and stock returns are positive and are statistically significant in the event-month in case of dividend increase. It is concluded that signaling hypothesis is found to hold in Indian corporate bond market.
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