Abstract
An important assumption of the signaling hypothesis is that dividend change announcements are positively correlated with share price reactions and future changes in earnings. However, Miller and Modigliani (1961)sustains that, dividend policy is irrelevant in arriving at a firm value, if the capital market is perfect. The purpose of this paper is to assess the potency of the dividend irrelevance theory on the Ghana stock market by using the Johansen-Juselius cointegration methodology on daily data of dividends, earnings and stock prices from January 2011 to December 2013. The results establish that equity prices in Ghana are not in sync with dividend announcements. However, the incorporation of earnings in the cointegration model provides varying result. The findings indicate that equity price change movements in Ghana are not responsive to dividend news.
Highlights
The Ghana equity market in 2013 experienced an outstanding performance of listed firms since its establishment in 1990
Even though both dividends and earnings show positive mean growth rates of 0.11% and 0.15% respectively, the level of unsystematic risk associated with the dividend variable is greater as a result of the higher standard deviation of 23.53% compared to 9.97% for earnings
In order to do this, we employ the general descriptive statistics to test for some features like skewness, autocorrelation and non-normality of the variables used
Summary
The Ghana equity market in 2013 experienced an outstanding performance of listed firms since its establishment in 1990. Cointegration implies that stock prices and fundamental variables (e.g. dividend) determining asset prices are attracted to each other in the long-run, if they follow integrated processes of order one and the transversality condition holds (Campbell and Shiller, 1987). To investigate how the market price of equities may deviate from their fundamental values, Cuthbertson & Nitzsche (2005) and Diba & Grossman (1998b) show that the market prices of assets are determined by future discounted dividends Their models investigate for bubbles by analyzing the stationarity properties of the stock prices and their fundamentals. The evidence of skewness, excess kurtosis, non-normality and autocorrelation in the dataset, as represented, is indicative of the likelihood existence of stock price departures from fundamental values in the Ghana equity market. The above results indicate that price deviations from fundamental variables are periodic and not continuous
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