The Effect of Dividend Initiation on Short-run Return in Indonesia: An Event Study with Propensity Score Matching Approach

Bambang Sugeng

doi:10.5539/ijbm.v11n12p207

Abstract

<p>Dividend initiation policy offers a relatively unique practical and conceptual characteristics compared to those of regular dividend. This study aims at investigating whether initial dividend policy of Indonesian firms affects short-run stock return, while further exploring the implementation of a new event study approach, <em>propensity score matching</em>, as an experimental-like design. This approach is based on actual rather than estimated abnormal return commonly used in traditional approach. Applying this new approach, this study found no significant abnormal returns around dividend initiation announcement by firms listed in Indonesia Stock Exchange. The findings imply that the dividend initiation behavior of Indonesian firms is proved not fully to follow the theoretical framework of signaling model, a dividend model which is basically developed primarily based on regular dividend behavior. The results partly contradict those findings mostly resulted from researchs conducted in advanced market context but seem to support contextuality argument of dividend policy. From methodological perspective, this study identified that the use of propensity score matching approach needs a large number of firms from which control firms are selected, accordingly the study conducted in market with limited number of listed firms such as in Indonesia could generates selection problem of control firms that optimally match treated firms.</p>

Highlights

Signaling model is one of the main theoretical explanatory models of dividend policy under the framework of the relevance of dividend proposition
Based on the result of this event study using propensity score matching approach, a novel approach in event study, this study proves that dividend initiation policy undertaken by firms listed on the Indonesia Stock Exchange (IDX) does not affect the short-term stock returns
By implementing propensity score matching, the new approach of event study, this research has proved that there is no significant short-term market response to dividend initiation policy. This means that there is no signaling phenomenon on one of the corporate actions post-Initial Public Offering (IPO) dividend initiation undertaken by firms listed in Indonesia Stock Exchange

Summary

Introduction

Signaling model is one of the main theoretical explanatory models of dividend policy under the framework of the relevance of dividend proposition. Signaling model of dividend developed by Merton Miller and Modigliani (1961), Bhattacharya (1979), John and Williams (1985), and Miller and Rock (1985), builds upon the framework of asymmetric information This model explains that the managers as corporate insiders use dividend policy as a means to provide a signal to the investors or market about private information associated with the prospects of the firm's performance. When the company announces a dividend or change in dividend, investors will perceive the announcement as an indication of the company's future performance or profitability With such arguments, Merton Miller and Modigliani (MM) (1961) claimed that the investor reaction to changes in the dividend policy is not caused by investor’s preference to dividends rather than capital gain but is caused more by information content carried by the dividend announcement. The signaling effect arises if the firm makes changes to the dividend policy as a result of the changes in expectation of firm’s economic conditions

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Conclusion