A Study on the Impact of Dividend Announcement on Stock Price

Transcription

1 Journal of Advance in Social Science and Humanities ISSN: CrossRef DOI: A Study on the Impact of Dividend Announcement on Stock Price Amit Balkrishna Joshi 1, Dr. Manas Mayur 2 1 Student of Goa Institute of Management, Goa. 2 Faculty at Goa Institute of Management, Goa. Accepted ; Published A bstract: Dividend announcements are always a matter of concern for the investors to make investment decisions in equity of any company, as it is a major component for maximizing the wealth of shareholders. This paper examines the share price reactions of top 20 PSU (Public sector units) companies by market capitalization listed in Bombay Stock Exchange (BSE), surrounding 20 days of announcement (-10 days to +10 days) during the year The findings suggest that there is a significant difference in the impact of dividend announcements in pre and post announcement period on the share prices of the selected companies. Hence, investors are advised to follow dividend decisions of the companies ardently in order to make wiser investment decisions. Keywords: Investment, Shareholders, Bombay Stock Exchange, Companies, Ardently. Introduction Stock market is said to be the barometer of an economy and thus its behaviour is under constant observation. Stock indices are the combination of representative factors like companies and sectors which play a vital role in growth and development of the sector. Many economic and non-economic factors affect the movement of the indices and events. The growing linkages of national markets in currency, commodity and stock with world markets and existence of common players create volatility in the market averse. An understanding of the market volatility is important from the regulatory policy perspective. An investor aims to maximize the return and minimize the risk (losses) in the stock market. A company's liquidity in the present market can be determined by the dividend announcements made by the company. One of the most meaningful events for research is dividend announcements. In simple terms dividend is the cost of equity capital to equity shareholders. Equity investors look upon dividend announcements as the market price of the shares are positively or negatively affected by the dividend announcements made by the companies. Any announcement of changes in corporate finance variables like dividends in an uncertain economic environment are very often regarded as signals sent by the company management to be interpreted by the outside investors. Numerous models for interpreting such signals have been developed to explain the share price reaction to such announcements. One such model is Event methodology study. It has been used to investigate the semi-strong form of market efficiency. Information disclosures related to mergers and acquisitions, stock repurchase announcements, dividends and earnings announcements and macroeconomic variables etc., have been investigated to test the semi-strong form market efficiency in a number of studies. Dividend announcements, whether a surprise or an increase to an already existing dividend, are one of the most common actions firms take in order to attract new

2 investors. These announcements by firms are usually seen as a sign of strength, suggesting that the firm has a substantial amount of excess capital. The present study provides an empirical evidence of the market's reaction to dividend announcements. It provides an opportunity to understand the markets' assessment of dividend payments, thus facilitating a better understanding of the dividend policies of Indian companies. The present study is important for investors, regulators, and management. Literature Review Dividend is considered as an important facet of organisation s financing decision and has attracted the researchers all over the world to find its underlying secrets. Despite a lot of research been undertaken in this field, yet till now, no conclusive answer is there as to the reasons behind dividend distribution and its impact. There is abundant literature that has examined market reaction to dividend announcements. And majority of the studies have concluded the presence of a positive association between announced changes in dividend policy and stock price movements. Neetu & Shuchi [1] found that Investors do not gain significant value in the period preceding as well as on the dividend announcement day, yet they can gain value in the post announcement period. The evidence nevertheless shows that dividend increases lead more positive abnormal returns, supporting the Efficient Market Hypothesis. Subhendu [2] found that there is a rise price after result but that rise in price is mainly due to market conditions rather than dividend. The increase or decrease in share price is not reflecting the amount of dividend. The CAR is positive in the long run after dividend announcement. The study of Shaveta et. al. [3] exposed the fact that stock prices do react positively to increase in dividend announcements. Dividend announcements do possess signalling property. Abdullahil, Nazamul, Abdullah [4] found that dividend declaration does not bring any gain to the investors; rather they lose due to substantial fall in share prices both in pre dividend and post dividend period as market passes through regular and continuous revision of directives of regulators to check a bullish market. The results of study conducted by Sultan & Kumari [5] indicate that Average Abnormal Returns are not found significant on event day during any period of dividend announcements. The results of paired t- test for means have shown that there are significant differences in average number of transactions before and after announcement from 2006 to On the other hand, the results of the paired t-test for means have shown mixed results for turnover and average traded quantity during the period under study. Thanwarat s [6] research result indicates that the stock prices move upward significantly after dividend announcements. Abnormal return (AR) and cumulative abnormal return (CAR) from the market model are statistically significantly revealed. The results confirm dividend signalling theory as the dividend announcements have significant impact on share prices. Dinh, Nguyen [7] results clearly show that the effect of dividend announcement on the stock return is positive around the announcement date. In addition, the stock price moves up as long as the ex-dividend date approaches and then starts decreasing from this date onwards. Abdullah [8] found that the empirical estimation based on the Fixed Effect and Random Effect Model show significant negative relation between Dividend Yield and Stock Price while Retention Ratio has a negative but statistically insignificant relationship with Stock Market Prices. Olatundun [9] finds that the cumulative excess returns (CERs) for dividend paying firms are positive and significant for 30 days from the day of the announcement, while the CERs for dividend omitting firms for the same period are significant and negative. The CERs for the subsamples are statistically significant around the event window. Overall, this provides evidence that the Nigerian stock market is not semi strong efficient, that dividend policy matters and that share prices do react to dividend announcements. Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May

3 Nikunj, Kalpesh [10] found that there is no occurrence of significant AARs on event day during any period of dividend announcement under study, whereas CAARs has been found significant on event period 57 times positive move, 49 times negative move and 64 times constant or near to zero volatility found. The results of paired t-test for means have shown that there are significant differences in average number of transactions between before and after announcement during the period 2008 to 2011 for the companies HUL, ITC, Jaiprakash, L & T, Reliance Industry, SBI, Tata Motor, and Wipro. Anjali, Guntur [11] paper finds that despite of investors do not gain significant value in the period preceding as well as on the dividend announcement day, yet they can gain value in the post announcement period. Investors do shift their security positions at the time of dividend announcement, which indicate that in post announcement period there is a possibility of information content in dividend announcement in BSE. Sukhjeet, Ravi [12], the findings suggest that there is a significant difference in the impact of dividend announcements in pre and post announcement period on the share prices of the selected companies. Hence, investors are advised to follow dividend decisions of the companies ardently in order to make wiser investment decisions. Douglas, Bacon [13] - Evidence here supports the positive signal associated with the sample of increased dividend announcements examined. Likewise, the study results support the semi-strong form efficient market hypothesis. Shirin, Kavita [14] findings show that there is an increase in the share price and has resulted in positive average abnormal return especially in the post dividend declaration period in Oman context. Galina, Elena [15] research revealed that the market reaction to the announcements of dividend payments looks inversely to type of the news, that is, an increase in dividends negatively affects shares prices and reduces the market value of the company. Decrease in dividends, on the contrary, increases the prices. "Neutral" news does not affect the value of the companies. These results correlate with the theory of dividend irrelevance Modigliani and Miller, according to which the company first prefer to implement investment projects. Payment of dividends indicates the absence of such projects. Thus, investors consider dividend payments rather as the evidence that the company has no profitable investment projects, than as the evidence of its stability and investment appeal. Need for the study The dividend-signalling hypothesis is one of the key issues of the field of corporate finance; perhaps no other area of finance has been subject to so much empirical investigation during the last five decades as the behaviour of stock prices in relation to dividend announcement. Therefore, an attempt has been made to review previous studies conducted in developed countries of the world as well as in emerging markets. However, very little research efforts have been made so far on the dividend behaviour of PSU (Public Sector Undertakings) sector. In this paper I ll examine share price reactions of PSU companies listed in BSE, surrounding 20 days of announcement (-10 days to +10 days) during the year Hypothesis To achieve the above stated objectives, the following hypotheses have been formulated for the proposed study: H0 There is no significant difference of pre and post announcement of dividend on stock price returns. H1: There is significant difference of pre and post announcement of dividend on stock price returns. Research Methodology The study focuses to investigate the impact of dividend announcement by examining the reaction of stock price to dividend announcements using event study methodology to explore stock returns around the dividend announcement date. Event study studies the behaviour of firms stock price around corporate or economic events such as Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May

4 dividend announcements. In the academic accounting and finance field, event studies have been applied to a variety of firm specific and economies wide events. In most applications, the focus is the effect of an event on the price of a particular class of firms share. Some examples as earning announcement, mergers and acquisitions, issues of new equity or debt and dividend announcement which is the study in this paper. An event study describes a technique of empirical financial research that permits an observer to evaluate the impact of a particular event on a stock price like dividend announcement and stock return. Sample Moreover, to study the impact of dividend announcements, this paper will examine share price reactions of top 20 PSU (Public sector units) companies by market capitalization listed in Bombay Stock Exchange (BSE), surrounding 20 days of announcement (-10 days to +10 days) during the year The event date is the dividend announcement date, when the board of directors has proposed the dividend proposal, is defined as t= 0, the time window is the estimation period and event period is the time period over which the share prices of the firms are involved. The interest period is prior and after the event date to capture the price effect of announcements which occur after stock market closes on the announcement day. This paper uses a time period of -10 to +10. Methodology An event study is a test that attempts to measure the valuation effects of a corporate event, such as merger, earnings announcement or dividend announcement, by examining the response of the stock price around the announcement of the event. The timeline for a typical event study is shown below in event time: T-10 T-3 T-2 T-1 0 T+1 T+2 T+3 T+10 The interval T-10 to T+10 is the event window Time 0 is the event date in calendar time Ø Event window: We use data from this time period, in conjunction with the and the β of the stock or stocks to determine: - Whether the event announcement was anticipated or leaked. - The post announcement effect: how long it took for the event information to be absorbed by the market. In this paper event window is of 20 days. Event Study Methodology Data Source The historical stock prices and the dividend announcement data have been taken from the websites and respectively. Significance testing -Do the Average Returns indicate that the event had a real effect on the price of the firm s stock? -For analysis, using the standard α = 0.05 cutoff, the null hypothesis is rejected when p <.05 and not rejected when p >.05. Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May

5 Table 1: Top 20 PSU Companies by Market Capitalization SL Scrip Code Company Name Market Cap (Crs) ONGC SBI Coal India IOC NTPC Power Grid BPCL GAIL HPCL NMDC BOB NHPC PFC BEL BHEL OIL REC Container Corporation Canara Bank 16, Central Bank of India 15, Table 2: Summary of the observations Variable Observations Mean Std. Dev. Min Max t t t t t t t t t t t t t t t t t t t t t Table 2 shows that there is negative average return on the day of the dividend announcement whereas there is positive average return one day prior and two days after the announcement of dividend. Empirical Study Results The findings in this study are obtained in terms of the event study methodology in which the abnormal return of company with a view to study the impact of dividend announcement. In order to investigate the occurrence of Average return centric to dividend announcement date were obtained for sample stocks for the study period. The same were concentrated for 20 days event window comprising 10 days prior/ post to dividend announcement. One Sample t-test A t-test helps you compare whether two groups have different average values. The t-test s statistical significance and the t-test s effect size are the two primary outputs of the t- Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May

6 test. Statistical significance indicates whether the difference between sample averages is likely to represent an actual difference between populations (as in the example above), and the effect size indicates whether that difference is large enough to be practically meaningful. The One Sample T-Test is similar to the Independent Samples T-Test except it is used to compare one group s average value to a single number. Table 3: One sample t-test results Pre-Announcement Post-Announcement Average Average Days Return t-test p-value Days Return t-test p-value Figure 1: Average return and p-value during the event window One Sample t-test A v e r a g e R e t u r n Average Return p value Day Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May

7 Table 3 and Figure 1 depicts that the first 3 days of the pre-announcement window have positive average return, where the first two are statistically significant at 1 percent and the third is at 5 percent. But as the dividend announcement day gets closer, the average return turns negative except for the previous day of the announcement where the average return turns positive, but statistically not significant. Post announcement the returns are positive for the first two days but are not statistically significant. The average returns are negative for 6 days while they are positive for only 4 days. Out of the 6 negative average returns, 2 values are statistically significant at more 1 percent and 2 values at 5 percent. The positive returns are not significant on any of the 4 days. The observed results indicate that the investors perceive the announcement of stock dividends to be beneficial for them. Although the change of positive reaction prior to the announcement day to negative reaction after the announcement day indicates that the investors overreacted initially to these announcements, but a correction to this overreaction by the investors takes place quickly. Such findings lead to the conclusion that the null hypothesis of no significant difference of pre and post announcement of dividend on stock price returns is rejected. The rationale for such results seems to be that the information about the stock dividend announcements reaches the investors prior to the decision date as it is mandatory for the issuing company to inform the exchange (where it is listed; in this case, it is Bombay Stock Exchange) about the board meeting and the date of the board meeting. It has been observed that the companies usually inform the exchange around seven days prior to the day of the board meeting. In fact, most of the times the companies provide the agenda item information along with the board meeting date to the exchange. In such a situation, the moment this information about the meeting and the agenda item is given to the exchange, this becomes public information and investors start reacting to it. This result is similar to the study of Dinh,Nguyen [7] where the effect of dividend announcement on the stock return is positive around the announcement date and the stock price moves up as long as the exdividend date approaches and then starts decreasing from this date onwards. Two sample t-test The paired t-test is used when each observation in one group is paired with a related observation in the other group. Table 4: Two sample t-test results t-1 to t+1 t-1 to t+2 t-1 to t+3 t-test p value Table 4 depicts that the first 2 days post announcement are not different compared to t-1 day, whereas the third day post announcement is different compared to t-1 day i.e it is statistically significant at near to 5 percent. This leads to the conclusion that the null hypothesis of no significant difference of pre and post announcement of dividend on stock price returns is rejected on the third day. Conclusion The stock dividends issue is like a puzzle in finance that researchers have been trying to solve. The present research work is also an effort in the same direction. It has been conducted to capture market reaction, in terms of stock price and volume, pertaining to stock dividend decisions in India. The study shows that the announcement of stock dividends induces an increase in the wealth of the shareholders in India. The change of positive reaction prior to the announcement day to negative reaction after the announcement day indicates that the investors overreacted initially to these announcements, but a correction to this overreaction by the investors takes place quickly. The justification for such results seems to be that the information about the stock dividends announcement reaches the investors prior to the decision date as it is mandatory for the issuing company to inform the about the board meeting and the date of the board meeting. It has been observed that the companies usually inform the exchange around five to seven days prior to the day of the Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May

8 board meeting. In fact, most of the times, the companies provide the agenda item information along with the board meeting date to the exchange. In such a situation, the moment this information about the agenda item is given to the exchange, this becomes public information and investors start reacting to it. Thus, the results of the present research work indicate that the investors perceive the announcement of stock dividends to be beneficial for them; they believe that stock dividends provide positive signal about the future prospects of the company, thus supporting signalling hypothesis. As this study provides a detailed analysis of dividend announcement impact on stock prices, it can be helpful for investors and investment managers in understanding the behaviour of market with regard to dividend announcement. This study can be further expanded in future in other areas like impact of merger/acquisitions, stock splits, stock repurchase and their impact on stock prices. References [1] Mehndiratta Neetu, And Shuchi Gupta (2010). "Impact Of Dividend Announcement On Stock Prices." International Journal Of Information Technology And Knowledge Management 2, No. 2 (2010): [2] Pradhan, Subhendu Kumar (2014). "Impact Of Dividend Announcement On Share Price: Both Sector And Industry Wise Analysis." Samzodhana J O U R N A L O F Ma N A G E Me N T, Vol. 3 Issue 1, [3] Gupta, Shaveta, Balram Dogra, A. K. Vashisht, And Shevata Ghai (2012). "Stock Price Reaction To Dividend Announcements." International Journal Of Financial Management 2, No. 2 : [4] Mamun, Abdullahil, Nazamul Hoque, And Abdullah Mohammad Ahshanul Mamun (2013). "Stock Price Reaction To Dividend Announcement: The Case Of Bangladesh Capital Market." Journal Of Economics And Sustainable Development 4, No. 8: [5] Sultan Singh And Kumari Sapna (2011) Stock Return Behavior Around Dividend Announcements In India: A Study Of BSE A - Group Listed Companies. International Journal Of Multidisciplinary Research Vol.1 Issue 2, [6] Suwanna, Thanwarat (2012). "Impacts Of Dividend Announcement On Stock Return." Procedia-Social And Behavioral Sciences 40: [7] Ngoc, Dinh Bao, And Nguyen Chi Cuong (2016). "Dividend Announcement And Ex- Dividend Effects On Stock Return." International Journal Of Economics And Finance 8, No. 7 : 207. [8] Masum, Abdullah (2014) "Dividend Policy And Its Impact On Stock Price A Study On Commercial Banks Listed In Dhaka Stock Exchange." Global Disclosure Of Economics And Business 3, No. 1. [9] Adelegan, Olatundun Janet (2009). Price Reactions To Dividend Announcements On The Nigerian Stock Market. No. RP_188. Kenya: African Economic Research Consortium, [10] Patel, Nikunj, And Kalpesh Prajapati (2015). "IMPACT OF DIVIDEND ANNOUNCEMENT ON THE STOCK PRICES OF INDIAN COMPANIES: AN EMPIRICAL EVIDENCE." ASIA PACIFIC JOURNAL OF FINANCE AND RISK MANAGEMENT, Vol. 5, Issue 2, [11] Rane Anjali And Guntur Anjana Raju (2016), Impact Of Dividend Announcement On Stockholder s Return An Empirical Analysis Of Indian Healthcare Sector. Doctoral Research Conference In Business Studies And Social Sciences (DR16 India Conference) ISBN: Chennai-India. 2 April, Paper ID: DRC610, Pp [12] Matharu, Sukhjeet K. (2015) "An Empirical Study Of Stock Prices' Sensitivity To Dividend Announcements." Pacific Business Review International. Volume 8, Issue 3, [13] Laabs, Douglas S., And Frank W. Bacon (2013). "The Impact Of Increased Dividend Announcements On Stock Price: A Test Of Market Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May

9 Efficiency." ASBBS Proceedings 20, No. 1 (2013): 664. [14] Rosario, Shireen, And Kavita Chavali (2016). "Market Reaction On Dividend Announcement In Oman-An Event Study Methodology." International Journal Of Economics And Financial Issues 6, No. 1. [15] Berdnikova, Galina, And Elena Rogova (2014). "The Analysis Of Market Reaction On Dividend Announcements Of Russian Companies." In GSOM Emerging Markets Conference: Business And Government Perspectives ISBN, Pp Journal of Advances in Social Science and Humanities, Vol. 3, Issue. 5, May