International Journal of Financial Management

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Stock Price Reaction to Dividend Announcements


Affiliations
1 Assistant Professor, Apeejay Institute of Management, Jalandhar, India
2 Professor and Vice-Chancellor, Sri Sai Group of Institutes, Palampur
3 Professor, University Business School, Punjab University, Chandigarh
4 MBA (Ex-student)Apeejay Institute of Management, Jalandhar
     

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Dividend declaration is considered as one of the key focus areas of the organisation's financial policy. Majority of the companies consider it advantageous to declare the dividends, as it will have positive impact on its goodwill and the share prices. The dividend surprise conveys the same information as earnings surprise. Managers use the increase of dividends to signal about the firm. It means that firms announcing dividend initiations and increases should experience positive abnormal returns, while firms cutting and reducing dividend suffers negative abnormal returns. In this background, the present study is an attempt to study the stock price reaction to 65 dividend announcements (increase) by 28 companies during the period 2006-09 listed on BSE 30 Sensex. The analysis had been undertaken using Event study methodology. The study exposed the fact that stock prices do react to increase in dividend announcements and dividend announcements do possess signaling property. The study also found out that Indian stock market is inefficient.

Keywords

Dividend, Information Content, Signalling Theory
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  • Stock Price Reaction to Dividend Announcements

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Authors

Shaveta Gupta
Assistant Professor, Apeejay Institute of Management, Jalandhar, India
Balram Dogra
Professor and Vice-Chancellor, Sri Sai Group of Institutes, Palampur
A. K. Vashisht
Professor, University Business School, Punjab University, Chandigarh
Shevata Ghai
MBA (Ex-student)Apeejay Institute of Management, Jalandhar

Abstract


Dividend declaration is considered as one of the key focus areas of the organisation's financial policy. Majority of the companies consider it advantageous to declare the dividends, as it will have positive impact on its goodwill and the share prices. The dividend surprise conveys the same information as earnings surprise. Managers use the increase of dividends to signal about the firm. It means that firms announcing dividend initiations and increases should experience positive abnormal returns, while firms cutting and reducing dividend suffers negative abnormal returns. In this background, the present study is an attempt to study the stock price reaction to 65 dividend announcements (increase) by 28 companies during the period 2006-09 listed on BSE 30 Sensex. The analysis had been undertaken using Event study methodology. The study exposed the fact that stock prices do react to increase in dividend announcements and dividend announcements do possess signaling property. The study also found out that Indian stock market is inefficient.

Keywords


Dividend, Information Content, Signalling Theory

References