Dividend Signals Research Articles

Share Price Sensitivity Towards Dividend Announcement on Nifty Listed Companies

Dividend announcement is one of the key factors that influences the fluctuation in the share prices. The dividend is the cost of capital to equity shareholders. In recent years the securities and exchange board of India (SEBI) has initiated a number of reforms to make the Indian stock market at par with developed stock markets of the world. Dividend signals information to investors about the firm’s future performance. The impact of dividend announcements on share prices is likely to vary depending on the specific circumstances of each company and the overall market environment. On the one hand, dividend announcements can signal to investors that a company is financially strong and has a positive outlook for the future. The purpose of this project is to observe whether dividend announcement has impact on share prices of the Nifty listed companies. The objective of this study is to know the impact of dividend announcement on share price in Nifty Listed Companies. In order to achieve the objective of the study, the secondary data was collected through NSE Website. After the data collection, the data was analysed using Paired t-Test. The major findings from the project are few of the companies show impact of Dividend Announcement while most companies don’t show impact of Dividend Announcement. So, it can be concluded that the overall, there is no impact of Dividend Announcement on Share price of Nifty Listed Companies. Investors should carefully consider a company’s overall financial health, dividend policy and long-term growth prospects before making investment decisions based on dividend announcements.

Are REIT Dividend Changes a Firm-Specific or an Industry-Level Signal? Evidence From the Decomposition of Stock Returns

This study examines the firm-specific and industry-level effects of dividend announcements by equity real estate investment trusts (REITs). Using stock returns to measure the information impounded in stock prices from dividend announcements, we decompose stock returns into three return components: firm-specific, industry-level, and market-wide. This decomposition allows us to examine the relative importance of the firm-specific and industry-level information contained in dividend announcements. We find that the market reaction to equity REIT dividend changes is mainly driven by the firm-specific return component. We also find that equity REIT managers are more likely to cut (raise) dividend payments when the stock price reveals less (more) firm-specific information. Moreover, the managerial dividend signal can explain the announcement-period firm-specific abnormal return but not the industry-wide abnormal return, suggesting that the managerial dividend signal conveys mainly firm-specific information.

Asset trading under non-classical ambiguity and heterogeneous beliefs

We propose discrete time asset trading framework based on quantum probability formalism that represents well the ambiguity of agents in respect to the fundamental values and price states of the traded assets. Divergence of beliefs alike classical finance frameworks (e.g. works by Harrison and Kreps, (1978) ; Scheinkman and Xiong, (2003)) produces different expectations of agents about the future price distribution of the traded risky asset. The model accounts for the emergence of heterogeneous beliefs from agents’ ambiguity about both the future asset price states and the fundamentals, as opposed to the strands that attribute heterogeneous beliefs to asymmetric information and different, yet firm prior beliefs about stochastic processes over fundamentals. The introduced quantum probability paradigm allows to depict a genuine ambiguity of agents in respect to the future realization of payoff relevant variables and prices. There are two sources of ambiguity: (i) the imperfect market knowledge of agents, manifest in a divergence of ambiguous priors, (ii) uncertainty about the probability distribution of price states and dividends in the next trading period. Agents update their beliefs via Born rule (instead of Bayesian update) when observing the realizedprice outcomes and dividend signals. An important feature relates to individual traders’ not possessing a joint probability distribution over the payoff relevant variables and price outcomes that brings up attraction, respective aversion to ambiguity in their interpretation of public signals. On the level of the composite model of stock exchange, formed by the expectations of two ensembles of agents, an interference term can serve as a quantitative testable prediction in respect to the excess volatility of asset prices created by traders’ optimistic and pessimistic beliefs.

How Important are Dividend Signals in Assessing Earnings Persistence?

ABSTRACTWe build and test a Bayesian model that shows how investors revise their earnings persistence expectations after dividend announcements. When dividend changes confirm preceding earnings changes, our model predicts inverse u‐shaped investor revisions conditional on the prior expectations for noisy dividend signals. As the dividend signal becomes more informative, our model predicts that investor revisions will become more skewed converging to a monotonically decreasing relation for perfectly informative dividend signals. When dividend changes contradict preceding earnings changes, our model predicts u‐shaped investor revisions. In empirical tests, we find results generally consistent with our model predictions.

How Do Free Cash Flow and Dividend Policy Affect Stock Return?

.

How Important are Dividend Signals in Assessing Earnings Persistence?

We build and test a Bayesian model that shows how investors revise their earnings persistence expectations after dividend announcements. When dividend changes confirm preceding earnings changes, our model predicts inverse u-shaped investor revisions conditional on the prior expectations for noisy dividend signals. As the dividend signal becomes more informative our model predicts that investor revisions will become more skewed converging to a monotonically decreasing relation for perfectly informative dividend signals. When dividend changes contradict preceding earnings changes, our model predicts u-shaped investor revisions. In empirical tests, we find results generally consistent with our model predictions.

Dividends and Subsequent Profitability: An Examination of a Dual Dividend Stock Market

This study examines the association between dual dividend changes and future profitability. A fundamental characteristic of dual dividend payouts is that both components, cash dividends and stock dividends, emit separate dividend signals for subsequent profitability. To analyze dividend signal theories, this study partitions the sample into three sub-samples according to the ratio of cash to stock dividends. Empirical evidence strongly indicates that dual dividend changes are positively associated with future profitability in the balanced dividend subsample. The results of this study are generally robust in terms of accommodating the factors of stock repurchases, investment growth opportunities, and business cycles.

Corporate Bond Price Reactions to Dividend Changes

Employing an event study approach, we examine 5,574 bond return reactions to unexpected quarterly dividend change announcements in the U.S. corporate bond market over the period 2002–2014. Overall, we report a significant bond price reaction in the same direction as dividend changes, which supports the hypothesis that dividend changes signal future firm performance. We also find that the bond return reaction is more pronounced if the dividends are reduced than if they are increased. We document a wealth transfer effect when riskier bonds are issued by firms with a low cash ratio and are approaching maturity. These results still hold after we control for the financial crisis and dividend covenants and when we use alternative variables to capture the dividend surprise.

Share price behaviour around dividend announcements in Pakistan

This paper investigates the information content (signalling) of dividend announcements by firms listed on the Karachi Stock Exchange (KSE) over the period 2005 to 2009. This sample period was selected in order to avoid contamination of the dividend signal with a capital gains tax effect since a capital gains tax was introduced in Pakistan from 2010 onward. The paper contributes significantly to literature about the Pakistani market which has a unique institutional background. The findings show that no significant unexpected returns can be earned on the announcement date by trading on dividend news in Pakistan. It supports the semi-strong form of the efficient market hypothesis. The results also show that earnings are the dominant signal rather than the dividend announced. Moreover, there is some evidence of information leakage as significant unexpected returns were uncovered two days before the dividend announcements.

Share price behaviour around dividend announcements in Pakistan

This paper investigates the information content (signalling) of dividend announcements by firms listed on the Karachi Stock Exchange (KSE) over the period 2005 to 2009. This sample period was selected in order to avoid contamination of the dividend signal with a capital gains tax effect since a capital gains tax was introduced in Pakistan from 2010 onward. The paper contributes significantly to literature about the Pakistani market which has a unique institutional background. The findings show that no significant unexpected returns can be earned on the announcement date by trading on dividend news in Pakistan. It supports the semi-strong form of the efficient market hypothesis. The results also show that earnings are the dominant signal rather than the dividend announced. Moreover, there is some evidence of information leakage as significant unexpected returns were uncovered two days before the dividend announcements.

AN EMPIRICAL EXAMINATION OF THE DIVIDEND INFORMATION CONTENTS IN THE BALANCE SHEET: A Signaling Approach*

This study examines whether the changes in the financial statements and dividends can together provide a better information transmittal system to deliver missing private information on the firm using Indonesian firms as the sample. In doing so, this study consider three components in evaluating the dividend signaling theory: the expected content favorableness, the sign of dividend change, and the role of dividend signal. Thefinding shows that in Indonesia, the market reactions to the dividend announcements depend on the role of dividend signals, whether it is confirmatory, clarificatory, or unclear. The other finding shows that this market is more concern to the content expected favorableness rather than to the dividend sign.

Information Content of Dividends: A Case Study of Nigerian Firms

Corporate dividend policy has been a thing of concern to the financial managers and the firm at large. Firms are faced with dilemma of sharing dividend to stock-holders and retaining their earning with the view to ploughing it back into the business so as to foster further growth of the business. This study is an attempt to evaluate the observed dividend policy of a cross section of 60 Nigerian quoted Firms. The information content of dividends (signalling) hypothesis predicts that dividends can be used to signal firm’s future prospects and only good-quality firms can use such a device. Nigeria as an emerging market provides an excellent laboratory to test this hypothesis. Specifically, the Nigerian investment environment is pervaded with a host of uncertainties. Cross sectional weighted least squares regression provides strong support that the information content of dividends’ hypothesis holds well in Nigeria. Our empirical evidence indicates that the hypotheses of signalling theory performs remarkably well in Nigeria. Corporate dividend payout policy signals crucial information to investors about companies’ future prospects. We recommend that corporate management should follow a generous dividend policy which will maximize the long term benefits to its stockholders.

Dividends and Market Signalling: an Analysis of Corporate Insider Trading

Abstract This study tests the multiple‐signal theory of dividends of John and Lang (1991) in the context of a European market. Our evidence shows that investors are more sensitive to insider trading signals than to signalled changes in existing dividends. In effect, the insider sales signal is universally understood as bad news. After controlling for the quality of a firm's investment opportunities, investors are found to penalise dividend outflows by mature firms that exhibit more informed insider sales activity. Finally, we offer an innovative exploration of the role of earnings announcements in market reaction to the dividend signal.

Signaling through Accounting Accruals vs. Financial Policy: Evidence from Bank Loan Loss Provisions and Dividend Changes

This study examines substitution or complementarity relationships between discretionary loan loss provisions (LLP) and dividend signals. The statistical tests and results presented in this study indicate that bank managers may signal simultaneously with an accounting policy (i.e., discretionary LLP) and a financial policy (i.e., dividend change). This finding primarily points out the possibility that a bank manager with an incentive to mitigate asymmetric information can select multiple signals to maximize signaling effects. Thus, LLP signaling is a complementary (rather than a substitute) signaling device of dividend signaling.

Alternative event study methodology for detecting dividend signals in the context of joint dividend and earnings announcements

AbstractFriction models are used to examine the market reaction to the simultaneous disclosure of earnings and dividends in a thin‐trading environment. Friction modelling, a procedure using maximum likelihood estimation, can be used to replace both the market model and restricted least‐squares regression in event studies where there are two quantifiable variables and a number of possible interaction effects associated with the news that constitutes the study's event. The results indicate that the dividend signal can be separated from the earnings signal.

Institutional ownership, volatility and dividends

We find that the sign of the correlation between institutional ownership and volatility depends on the firm’s dividend policy: institutional ownership is negatively (positively) related to volatility among non-dividend (dividend) paying stocks. The empirical results are consistent with an interaction between institutional preference for low volatility and the tendency of higher levels of institutional ownership to increase volatility through their trading behavior. This result is robust to many control variables and possible endogeneity concerns. Supporting our conjecture that institutions herd on dividend signals we find that the correlation between turnover and institutional ownership is higher for dividend paying stocks, and that the positive correlation between turnover and institutional ownership is higher on dividend declaration days. Finally, we also find that the level of institutional ownership drops following an increase in volatility for both dividend payers and non-payers, and that volatility rises following increased institutional ownership for dividend paying stocks.

Does Dividend Stability Provide a Promising Stock Return? Evidence from Bursa Malaysia

This paper examines whether there is any significant impact between a stable dividend policy and firm performance. More recent empirical studies have looked at the association of dividend stability with risk factor. Stable dividend signals the stability of the underlying cash flow as this translates into lower level of uncertainty and business risk, while variable dividend stream will increase fluctuation of cash flows in the hands of shareholders. Thus they will require a higher rate of return in order to compensate them for the uncertainty of cash flows that they have to endure. Using 120 stocks from seven different industries in Malaysia covering over a period of six years from 2001 to 2005, our results suggest that there is no significant impact of dividend stability on stock market return. The results further reveal that dividend stability does differs significantly across different industry sectors.

Momentum, Dividend Policy, and Market Conditions

Non-dividend-paying firms generate higher momentum profit (0.73% per month) than the dividend payers following up markets. Extant literature suggests that the higher momentum profits following up markets can be explain via behavioral or rational asset pricing models. The rational asset pricing models suggest that the higher momentum profits following up markets stem from higher return autocorrelations during these periods since firms are closer to exercising their growth options when prices are rising (Sagi and Seasholes's (2006)). Thus, the higher momentum profit for the non-payers following up markets should be due to higher return autocorrelations for these stocks relative to their dividend-paying counterparts. This suggests higher expected returns for the non-dividend-paying winners relative to their dividend-paying counterparts and lower expected returns for the non-dividend-paying losers relative to their dividend-paying counterparts. While the evidence is consistent with the latter prediction, it is inconsistent with the former prediction. Specifically, the average return of the non-dividend-paying winners (1.85% per month) is not significantly higher than that of their dividend-paying counterparts (1.78%). Consequently, it is hard to explain the evidence via higher return autocorrelations for the non-dividend-paying stocks following up markets. The behavioral models suggest that the higher momentum profits following up markets are due to the price increases during these markets. In particular, the price increases increase aggregate overconfidence and reduce investor risk-aversion during up markets, and these work to increase momentum profits (Cooper, Guitierrez, and Hameed (2004)). Thus, the behavioral models suggest that the higher momentum profits among the non-dividend-paying stocks stem from higher price appreciations among these stocks when the markets are advancing. Consistent with this prediction, the evidence suggests that price appreciations among the non-dividend-paying stocks are higher than those among the dividend payers. This is due to asymmetric valuation of the dividend signal and the fact that growth opportunities are more important for the non-dividend-paying stocks. The evidence is, therefore, more consistent with the behavioral explanation for the higher momentum profit following up markets than the rational asset pricing explanation.

Institutional Ownership, Volatility and Dividends

We study the effect of a firm's dividend policy on the relation between the levels of institutional ownership and stock return volatility. We find that the sign of the correlation between institutional ownership and volatility depends on the firm's dividend policy: institutional ownership is negatively (positively) related to volatility among non-dividend (dividend) paying stocks. The empirical results are consistent with a tradeoff between institutional preference for low volatility and the tendency of higher levels of institutional ownership to increase volatility through their trading behavior. This result is robust to many control variables and the possible endogeneity of the level of institutional ownership. Supporting our conjecture that institutions herd on dividend signals we find that the correlation between turnover and institutional ownership is higher for dividend paying stocks, and that the positive correlation between turnover and institutional ownership is higher on dividend declaration days. Finally, we also find that the level of institutional ownership drops following an increase in volatility for both dividend payers and non-payers, and that volatility rises following increased institutional ownership for dividend paying stocks.

Testing dividend signaling models

This paper exploits a key monotonicity property common to dividend signaling models—the greater the rate that dividend income is taxed relative to capital gains income, the greater the value of information revealed by a particular dividend yield—to distinguish the hypothesis that dividends are used as a signaling device from the hypothesis that dividends contain information but are not used as Spencian signals. The monotonicity conditions are tested with robust nonparametric techniques. While the monotonic relationship predicted by signaling theory can be found, a more careful inspection reveals that it does not hold for different levels of the dividend signal, as required by signaling theory. This strongly suggests that existing signaling models cannot explain the dividend policy choices of firms.