Impact of Dividends Announcements on Stock Returns: Evidence from Casablanca Stock Market

Abstract

According to Efficient Market Hypothesis (EMH), stock prices reflect all available information, therefore, in an efficient market, no abnormal returns can be earned from this information since current prices already incorporate all existing information. Hence, the purpose of this study is to investigate the semi-strong form of market efficiency by examining the reaction of stock prices to dividend announcements in the Casablanca Stock Market. Thus, the basic question of this study is: Do dividend announcements affect stock prices? We used the Event Study approach to measure the impact of dividends announcement on stock prices by computing the average abnormal return (AAR) and cumulated average abnormal return (CAAR) , so as to evaluate their impact on the stock performance around the announcement day (for a period of 20 days prior and post-announcement). The empirical results indicate that the (AARs) and (CAARs) are statistically insignificant for the whole event window, implying that dividend announcements do not convey any information content, therefore, the results do not confirm the information content of the dividend hypothesis. Furthermore, the empirical results support the dividend irrelevance theory introduced by Miller & Modigliani (1961) and contradict the cash flow signaling theory, which argues that dividends are informative. Overall, results confirm the semi-strong form of market efficiency in the Casablanca Stock Market.