Market Reaction To Changes In Dividend Payments Policy In Jordan

Abstract

The purpose of this paper is to examine empirically the signalling theory for a sample of firms listed at Amman Stock Exchange (ASE) during the period 2001 to 2006. The sample consists of 215 observations. The Event Study Methodology (ESM) is employed to examine the market reaction to dividend change announcements. The nave model is used to classify the sample under four sub samples; Dividend Increase, Dividend Decrease, Dividend No Change and No Dividend No Change. The market model, mean adjusted model, market adjusted model, market model adjusted with Scholes and Williams and market model adjusted with Fowler and Rorke models are used to generate the expected returns. Also, the t-test, ZD test and Corrados non-parametric test are used to examine the significance of the mean and cumulative abnormal returns. Overall, the results show that the market reacts positively to dividend increase, dividend decrease and dividend no change announcements. In addition, the results indicate that there is no significant market reaction to dividend no change sample with zero distributions. This result indicated that there is little value-relevance to dividend change announcements. The interpretation of the positive market reaction is related to dividend release announcements rather than dividend changes. Therefore, there is some support to the signalling hypothesis to dividend release. Furthermore, applying thin trading models and non-parametric tests leads to the same conclusion.