Dividend Decreases Research Articles

Dividend change announcements, ROE, and the cost of equity capital

We hypothesize and present strong evidence that dividend increases (decreases) result in a general decrease (increase) in the opportunity cost of equity capital (Ke), measured by the discount rate implicit in analysts' forecasts. Estimates of Ke obtained from analyst forecast data likely capture priced information risk that is not reflected in cost of equity capital estimates customarily obtained from empirical excess returns data. In the presence of a full menu of control variables, our measured changes in the cost of equity capital are shown to provide high explanatory power for the market reaction to dividend change announcements. We also hypothesize and demonstrate that the impact of dividend changes on the cost of equity is conditional on how preannouncement Ke relates to preannouncement return on equity (ROE). Specifically, dividend increases result in a reduction in the cost of equity capital only when currently experienced ROE < Ke. This is consistent with shareholders preferring earnings to be reinvested by managers to earn a higher rate than their opportunity rate. When ROE > Ke, on the other hand, the cost of equity capital actually increases. For dividend decreases, the cost of equity capital increases only when ROE > Ke, consistent with firms currently experiencing positive economic income using dividend cuts to signal anticipated permanent earnings declines. Together with extensive robustness tests, our results indicate that dividend changes significantly affect shareholder value, contrary to the longstanding dividend irrelevance argument.

Using UK Data to Study the Effects of Dividends Announcements on Stock Market Returns

Using a sample of firms listed on the FTSE-350, this study examines the effects of dividends announcements on the London Stock Exchange (LSE) during the period from 1990 to 2019. We use the dividend-signalling hypothesis to test whether dividends announcements have any effects on stock returns. Our results suggest that dividend increase announcements have a positive effect on stock returns, and dividend decrease announcement reduce stock returns. On average, a dividend increase is estimated to increase stock returns by 6 basis points and a dividend decrease is estimated to reduce stock returns by the same amount. These findings are consistent with the dividend-signalling hypothesis.

Trading Applications Using EVA Style Analysis

The authors apply economic value added (EVA) style analysis to four corporate actions: acquisitions, share repurchases, stock splits, and dividend announcements. Firms acquiring public targets provide significant shorting opportunities on value-destroying growth and “wise” restructurers. Acquiring firms with private targets provide longing opportunities on underinvesting and wise restructurers. For share repurchases, the authors find consistent alpha opportunities on repurchasing firms by longing their stocks, with the highest alpha on the wise restructurers. The post-announcement returns for stock splits were negative for value destroyers and positive for restructurers. For dividend increases, post-announcement effects are small except for positive alpha on the wise restructurers. For dividend decreases, negative abnormal returns continue for the value destroyers and restructurers. The best longing opportunity is on the stocks of share-repurchasing companies in a wise restructurer position, while the best shorting opportunity is on the stocks of dividend-decreasing companies in a value-destroyer position. For active investors, EVA style analysis illuminates the naiveté of a “one size fits all” trading strategy on corporate actions.

Investigating beta anomaly: comparison of Shariah-compliant and conventional stocks

PurposeThe purpose of this paper is to examine the impact of dividend announcements on the stock return of Shariah-compliant and conventional stocks.Design/methodology/approachAn event study methodology is applied to study the beta anomaly. Market-adjusted return model, mean-adjusted return model and market model have been applied to calculate excess returns. Estimation period used in this study is 130 days, and event period consists of 21 days in total, i.e. starting from the day –10 “before the cash dividend announcement” to day +10 “after the cash dividend announcements.FindingsIt has been concluded from the results that dividend plays an informational role in the Pakistan Stock Exchange. As the investors in Pakistan react favorably to the dividend increase announcements and unfavorably to the dividend decrease announcements, they consider dividend increase announcement as good news and dividend decrease announcement as bad news.Practical implicationsThe findings of this study have several implications for different participants of the stock market, such as investors, academicians, researchers, fund managers and policymakers. They can use this information to make decisions while making efficient portfolios. Investors may get abnormal returns by focusing on the dividend announcement patterns. This can influence the attitude of investors toward efficient investments in the stock market and ultimately contribute to the betterment of society. This study is also beneficial for academicians and researchers, as it provides a comparative analysis of Shariah-compliant and conventional stocks and the anomalous effect of dividend announcements on stock return.Originality/valueLimited research in the world’s context and null is available in Pakistani context on the subject matter. The comparative analysis of “Shariah-compliant” and “conventional” stocks provides insight into the asset pricing of Shariah-compliant stocks that have not been explored earlier. This study also uses three different methods (mean model, market model and market-adjusted return models) to compare Shariah-compliant and conventional stocks

Strategic reactions to information content of dividend change: applying BCG growth share matrix when signalling hypothesis identified

The signaling hypothesis has been vastly under investigation for many years. There are two attitudes towards this phenomenon; some believe that firms increase (decrease) their dividend to signal about the future increases in earnings due to asymmetric information that managers have. Adversely, others believe that firms usually increase their dividends when they do not have further lucrative projects with positive net present values. Although there is a lot of empirical testing about this hypothesis that has been placed, there is no investigation about agency costs and cheating potential signaling hypothesis can provide for managers to cheat shareowners and market if it happens in the stock market. Through this article, we will test the signaling hypothesis for the firms listed in Tehran Stock Exchange, a rather volatile emerging market. We concluded that while dividend increases have no significant information content about future earnings, dividend decreases have meaningful information content about decreasing earning in the future. We use different scenarios that managers can react if the signaling hypothesis occurs and analyze the agency cost these scenarios bear on shareowners.

R2 and the corporate signaling effect

AbstractIf corporate announcements provide additional signals about firms' future prospects, the degree of investors' dependency on these news should vary with the relative importance of firm‐specific information on such publicly traded firms. We show that price, volume and volatility reactions to dividend change announcements are significantly stronger for less synchronized firms (e.g., low R2 stocks). This indicates that lower R2 stocks are less informative and thus more surprises on firm‐specific news are experienced. These findings are particularly strong for dividend decrease announcements. We also show that signals about firms' earnings prospects from dividend decrease announcements are more reliable among these companies.

Agglomeration Externalities and Skill Upgrading in Local Labor Markets: Evidence from Prefecture-Level Cities of China

Skill upgrading, the increase in the percentage of skilled workers in the employment population, boosts the economic growth of developing countries and sustains their industrial competitiveness. The international economics literature discusses the effects of international trade on skill upgrading, ignoring the potential role of agglomeration externalities. This paper takes China as a case study, which has been encountering a serious challenge about how to strengthen its industrial competitiveness in the world through skill upgrading as its population dividend decreases. The panel data of 2005, 2010 and 2015 from prefecture-level cities in China were used for regression analysis to explore the benefits from agglomeration externalities, including specialization and diversification effects, on skill upgrading. The results show that both the specialization effect and diversification effect do promote skill upgrading. Furthermore, there are significant differences in the influence of local agglomeration externalities across different regions, and the positive effect brought about by specialization externalities is usually dominant in undeveloped, inland or small cities, compared with the diversification in developed or coastal cities. Besides, manufacturing agglomerations exhibit positive externalities to skill upgrading mainly through specialization, while the service agglomerations mainly promote skill upgrading by means of diversification.

The Effect of Dividend Announcements on Stock Returns for Companies Listed on the Main Board of the Kuala Lumpur Stock Exchange

Stock market reactions to the announcements of final dividend increases, decreases and no changes are empirically analyzed in an emerging market environment. A standard event study methodology is adopted to examine the price reactions of 120 listed companies surrounding sixty days of the announcement dates. Although prior studies in developed countries postulate that dividend decreases are associated with negative abnormal returns, such a reaction was not found in the Malaysian capital market. The evidence nevertheless shows that dividend increases lead to positive abnormal returns, supporting the Information Content Hypothesis, Jensen :s Free Cash Flow Hypothesis and Agency Cost Theory. As for the no change dividend announcements, no clear pattern of cumulative average abnormal returns could be observed.

Market response to dividend change announcements: unregulated versus regulated US firms

AbstractThis paper attempts to determine whether there is a significant difference in how the stock market responds to dividend change announcements of regulated (both utilities and financials) versus unregulated firms and, if so, which factors cause this difference. An analysis of dividend change announcements of US firms over the period 1962–2016 shows that the market response is larger for unregulated than for regulated firms, but this difference is statistically significant only for dividend increases (not for dividend decreases). Further, cross‐sectional analysis indicates that, for dividend increases, the difference between regulated and unregulated firms increases with diffused ownership and informational asymmetry. When both these factors are controlled for, the difference between regulated and unregulated firms becomes statistically insignificant. Thus, the evidence suggests that the significant difference in market response to dividend increases of regulated versus unregulated firms can be explained by differences in diffused ownership and informational asymmetry. There seems to be no intrinsic difference between regulated and unregulated firms in the market response to dividend decreases.

SHARE PRICE REACTION TO CASH DIVIDEND ANNOUNCEMENT: AN EVENT STUDY OF LISTED FIRMS IN KENYA

This study aimed to establish the effect of cash dividend announcement on share price reaction of the firms listed on the Nairobi Securities Exchange (NSE). This study used Event Study methodology with purely secondary drawn data from 24 firms listed on the NSE who meet the study threshold with an event window of eleven (11) days during the year 2008-2013. The study adopted the descriptive research design and sampling de-sign being purposive. STATA version SE12 was used to produce a descriptive analysis. The findings indicate that the share price reaction to dividend announcement is posi-tive for a dividend increase and negative for dividend decrease and constant for the constant dividend. The study therefore recommends that the effect of the dividend on the firm’s share price is very crucial for not only the literature but also for the regula-tion and supervision of the capital market and that further development of accounting standards, increased auditing skills, and advances in investor education will likely make dividends even more important in the future. Following these findings, it would be useful to also consider the following directions for future research on whether there is any joint effect of cash dividend, bonus issues, and right issues on the share price of firms listed on NSE.

Pengumuman Dividen Tunai terhadap Return Saham

Penelitian ini bertujuan untuk menguji kandungan informasi dari pengumuman pembagian dividen yang dapat tercermin dari abnormal return yang timbul akibat adanya reaksi pasar. Pengumuman pembagian dividen ini dibagi menjadi dividen naik dan dividen turun. Reaksi pasar dapat diukur dengan menggunakan abnormal return sebagai nilai perubahan harga. Penelitian ini menggunakan pendekatan event study dan dilakukan pengamatan terhadap abnormal return selama 21 hari yaitu 10 hari sebelum pengumuman,1 hari pada saat pengumuman dan 10 hari sesudah pengumuman. Penelitian ini menggunakan data sekunder yang diperoleh dari Bursa Efek Indonesia (BEI). Penelitian ini menggunakan sampel sebanyak 43 perusahaan yang terdiri dari 26 perusahaan yang membayar dividen tunai naik dan 17 perusahaan yang membayar dividen tunai turun. Sampel diambil dengan menggunakan metode purposive sampling. Data yang digunakan dalam penelitian ini meliputi data perusahaan yang membayarkan dividen tunai yang terdaftar dalam kelompok saham LQ 45 periode Februari 2014-Januari 2015. Untuk menghitung return ekspektasian menggunakan Market Adjusted Model. Alat uji statistik yang digunakan adalah one sample t-test, paired sample t-test, dan independent sample t-test.&#x0D; Hasil dari penelitian ini menunjukkan bahwa (1) Terdapat abnormal return yang signifikan dengan adanya pengumuman dividen naik pada t-7,t-2,dan t0 yang semuanya bereaksi positif sedangkan untuk dividen turun juga terdapat abnormal return yang signifikan pada t-7,t0,t+3 yang semuanya bereaksi negatif dengan tingkat signifikansi 10%. (2) Terdapat perbedaan abnormal return sebelum dan sesudah pengumuman dividen untuk perusahaan yang mengumumkan dividen naik dan tidak terdapat perbedaan abnormal return sebelum dan sesudah pengumuman dividen untuk perusahaan yang mengumumkan dividen turun. (3) Terdapat perbedaan abnormal return sebelum pengumuman dividen untuk perusahaan yang mengumumkan dividen naik dan perusahaan yang mengumumkan dividen turun dan (4) Tidak terdapat perbedaan abnormal return sesudah pengumuman dividen untuk perusahaan yang mengumumkan dividen naik dan perusahaan yang mengumumkan dividen turun. Jadi dapat disimpulkan investor bereaksi pada saat sebelum pengumuman dividen,bereaksi positif untuk dividen naik dan bereaksi negatif untuk dividen turun.

Stock market reaction to cash dividends: evidence from the Nigerian stock market

PurposeVery little is known about the effect of dividend announcements on stock prices in Nigeria, despite the country’s unique institutional environment. The purpose of this paper is, therefore, to provide empirical evidence on this issue by investigating the stock price reaction to cash dividends by companies listed on the Nigerian Stock Exchange.Design/methodology/approachStandard event study methodology, using the market model, is employed to determine the abnormal returns surrounding the cash dividend announcement date. Abnormal returns are also calculated employing the market-adjusted return model as a robustness check and to test the sensitivity of the results to β estimation. The authors also examine the interaction between cash dividends and earnings by estimating a regression model where announcement abnormal returns are a function of both dividend changes and earnings changes relative to stock price.FindingsThe study find support for the signaling hypothesis: dividend increases are associated with positive stock price reaction, while dividend decreases are associated with negative stock price reaction. Companies that do not change their dividends experience insignificant positive abnormal returns. The results also suggest that both dividends and earnings are informative, but dividends contain information beyond that contained in earnings.Research limitations/implicationsThe sample for the study includes only cash dividend announcements occurring without other corporate events (such as interim dividends, stock splits, stock dividends, and mergers and acquisitions) during the event study period. The small firm-year observations may limit the validity of generalizations from these conclusions.Practical implicationsThe findings are useful to researchers, practitioners and investors interested in companies listed on the Nigerian stock market for their proper strategic decision making. In particular, the results can be used to encourage transparency and good governance practices in the Nigerian stock market.Originality/valueThis paper adds to the very limited research on the stock market reaction to cash dividend announcements in Nigeria; it is the first of its kind employing a unique cash dividends data.

SENSITIVITY OF DIVIDENDS TO EARNINGS CHANGES

This paper deals with probabilities of dividend changes for a given change in earnings. This so-called sensitivity of dividends to earnings changes was analyzed on a sample of Advanced economies and Emerging and developing economies, according to International Monetary Fund classification. The main goal of the research is to empirically verify the assumption that companies are generally reluctant to cut or reduce dividends regardless of the stage of economic development of the country. In addition, the probabilities of dividend changes for a given change in earnings in characteristic groups of countries - Baltic countries and former Yugoslavia countries - have been analyzed. Research results show that earnings are significant dividend factor in all sample countries, that companies are generally reluctant to cut or decrease dividends and that dividends are less sensitive to earnings changes in Advanced economies, compared to Emerging and developing economies. Research has also shown that dividends are less responsive to earnings changes in former Yugoslavia countries compared to Baltic countries. These findings are in line with Lintner (1956) who has shown that reduction in earnings is not necessarily followed by reduction in dividends. Such behavior of dividends can be explained even by prospect theory created by Kahneman and Tversky (1979). They have shown that investors are more sensitive to negative events than to positive events and that investors do not make decisions in relation to the overall wealth but in relation to a particular reference point, which is usually the status quo. If this is the case, the previous dividends represent a specific reference point in relation to which investors make decisions. Having in mind asymmetric reaction of the investing public to dividend increases and dividend decreases (or dividend cuts), companies are reluctant to cut or decrease dividends because they are trying to avoid negative market reaction.

The Announcement Effect of Cash Dividend Changes on Share Prices: Evidence from Dhaka Stock Exchange

This paper investigates the announcement effect of cash dividend changes on share prices listed on the Dhaka Stock Exchange (DSE). Standard event study methodology is used to investigate the effect of an event window of [Formula: see text]3 to [Formula: see text]3 days relative to dividend announcement date. Cumulative abnormal returns (CAR) have also been measured for a 41-day window around announcement date. This study finds that shareholders earn only normal return on the announcement of dividend increases and no changes. However, a significant positive abnormal return (AR) is observed in the preannouncement period for a dividend increase which indicates some kind of information leakage before the announcement is actually made. The announcement of dividend decrease results in a significant negative AR on the announcement day and persists even 20 days after the announcement. Significant ARs following dividend decrease announcement reveal DSE is not a semi-strong form of efficient market.

The Information Content of Dividend Announcements: Evidence from Frontier Markets with Varying Tax Regimes

This study provides further insight into the information content of dividends by investigating stock price reaction to the announcement of cash dividends in the unique environments presented by Jamaica and Trinidad and Tobago. In the case of Jamaica, we document a positive relationship between stock prices and dividend announcements during the period when the tax rate on dividends was 25% and the capital gains tax 0%, but no relationship when the tax rate on dividends fell from 25% to 5% with the capital gains tax rate unchanged. While, in the case of Trinidad and Tobago, where there are no taxes on dividends or capital gains, we find no statistically significant stock price reaction to the announcement of dividend increases and constant dividends but a positive relationship between the announcement of dividend decreases and stock prices. The results for Jamaica are largely supportive of tax-based signaling models which argue that higher taxes on dividends relative to capital gains are a necessary condition for dividends to be informative. However, the results from Trinidad and Tobago suggest that tax differentials are an important but incomplete explanation for the information content of dividend announcements.

New evidence on stock market reaction to dividend announcements in India

We revisit the information content of dividend announcements in India from 2012 to 2014 in a unique market setting which involves the introduction of Company’s Act 2013. We find that announcement of increase in dividend lead to increase in stock prices, while the dividend decrease announcements are associated with decrease in stock prices. Firms that announce no change in dividends, experience insignificant negative returns around the event date. Our results contradict the tax-signaling model, which argues that higher taxes on dividends than capital gains are necessary for dividend announcements to be informative. The abnormal returns increase post the introduction of Company’s Act 2013. The results of the firm-specific panel regressions indicate that the information content of dividends has a non-linear relation with the founder ownership consistent with the monitoring and rent extraction hypotheses.

Pengaruh Perubahan Dividen Terhadap Profitabilitas Perusahaan Pada Masa Yang Aakan Datang (Future Profitability)

&lt;em&gt;The research investigates the incremental information content of dividend changes about future profitability. We regress three of measurement of earnings (earnings level, earnings changes and abnormal earnings) to dividend changes and a number of control variables. By using 87 samples (420 firm years) of firm at Jakarta Stock Exchange over 1997-2003, We find that dividend changes provide information about the earnings insubsequent years, incremental to market and accounting data. The paper also documents that dividend changes are positively related to earnings changes for merely four year ahead. In detail examining, We find that dividend increase convey must new information about earnings changes and abnormal earnings for three year ahead than dividend decrease.&lt;/em&gt;

Capital Market Response to the Change in the Dividend Policy: The Case of Slovenian Stock Market

&lt;p&gt;The three basic dividend policy theories have a completely different approach to describing the influence of dividends payment on stock price, and on the value of the company. Numerous studies conducted in this area have led to almost as many derived dividend policy theories, which are more or less related to the basic three. As one of them Wang, Manry &amp;amp; Wandler (2011) specify the dividend signalling theory, which is based particularly on the assumption of the asymmetry of information between the company management and the shareholders and in recent decades it has been studied by many authors, who mostly concluded that dividend increase has a positive stock price reaction, and vice versa, that dividend decrease results in stock price falls (as cited in Ross, 1977; Leland and Pyle, 1977; Grinblatt et al., 1984; Baker and Phillips, 1993; Rankine and Stice, 1997; Bechmann and Raaballe, 2007). For the purposes of our analysis we adopted the methodology of foreign researches and checked the existence of the dividend signalling theory in the Slovenian stock market. The Slovenian stock market is one of developing markets, and is particularly specific due to its small size and illiquidity. Our research resulted in no statistically significant stock price increases from company dividend increases, whereby we have refuted the research hypothesis and, consequently, the dividend signalling theory in the Slovenian stock market in the described period.&lt;/p&gt;

Determinants of stock prices during dividend announcements: an evaluation of firms' variable effects in Nigeria's oil and gas sector

AbstractThe aim of this research was to analyse, statistically significant, quantitative variables that determine the share price of oil and gas sector companies listed on the Nigerian Stock exchange, during the economic slowdown period of 2009–2013, after the world financial crisis of 2008, and investigate whether the signalling hypothesis holds or not. In terms of analytical tools, multiple regression analysis is used. During dividend increase announcements, the regression coefficient determinant (R2) indicates that over 90 per cent of variations in stock prices is explained by variations in dividend announcements. This study supports the dividend signalling hypothesis (DSH) but discredits the efficient market hypothesis. During a dividend decrease, the R2 for both equations indicates that over 64 per cent of variations in stock prices is explained by variations in dividend announcements. This result also supports the DSH. The implication of this is that racketeers can capitalise on this and make unjustified returns. By so doing, both sector investors and the stock market will be short changed. As this research considers only the oil and gas sector, further studies need to be conducted that consider possibly all listed firms in the Nigerian stock market, within the same interval to further investigate if the signalling hypothesis will hold or not. But most appropriately, applicable, as a comparative study of the same sector before and after the world financial crisis of 2008 the paper seeks to find out if this phenomenon is also applicable to OPEC member states. This research is in progress.

FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE

According the dividend signalling hypothesis, it is expected a positive relationship between dividend change announcements and the subsequent share price reactions. However, empirical results are not consensual. This study investigates whether firm-specific factors contribute to explain a negative market reaction to dividend change announcements, contributing to the scarce analysis of firm-specific factors explaining the inverse share price reaction to dividend change announcements. The study applies the panel data approach to three European markets. The results show that the market reaction to dividend change announcements is negatively associated with the firm size. We find that the negative market reaction to dividend increase announcements is associated with firms that have, on average, lower dividend changes and higher growth opportunities. Moreover, the results suggest that a high percentage of dividend negative changes, decreases the likelihood that the market reacts positively to a dividend decrease announcement. Globally, we find some evidence for the dividend signalling hypothesis.