Stock Price Adjustments to Selected Corporate Announcements: A Study of Dividend Announcements

 

Rajesh Khurana¹, Dr. D. P. Warne²

¹Doctoral Research Scholar, Chaudhary Devi Lal University, Sirsa, Haryana

²Chairperson, Department of Commerce, Chaudhary Devi Lal University, Sirsa, Haryana

 

ABSTRACT:

This study tests the semi-strong form of market efficiency by investigating the reaction of stock prices to dividend announcements. This study belongs to event study methodology. The focus of present study lies in the sample period from 2006 to 2015 for finding out significant changes in the abnormal stock returns pre and post dividend announcement by 245 sample events from 14 different sectors which are listed at NSE 100. The results indicate that there are insignificant positive abnormal returns can be observed from the day five (t₊₅) of dividend announcement in line with evidence of developed stock market. On the announcement day there is negative AAR of -0.28% which is very low and insignificant (z value = 0.007). None of the sector observed significant positive abnormal returns (AARs) out of 14 sectors. The results provide stronger evidence of semi-strong efficiency of the Indian stock market.

 

 

INTRODUCTION

In the corporate finance world, companies don’t have any obligation to pay dividends. However, we still see a large number of corporations paying out dividends regularly. The crucial question is why do companies pay dividend? Dividend pay-out decision is among the basic policy choices that corporate financial officers make. How much to pay is still an open issue. The dividend is the cost of equity capital to equity shareholders. The dividend announcement has an impact on the market price of the shares; the market will react positively, if the dividend is up to the expectation level of the equity shareholders.

 

 

At the same time if the dividend announcement is not the expectation level of the equity investors, the market reaction will in bear trend for that particular scrip. Dividend announcements are one of the most important events and the studies on stock market reaction to earnings information are included in the semi-strong form of efficient market hypothesis (EMH). It is therefore a matter of concern that firms announcing Dividend experience rise in their stock prices on an average supporting semi-strong form Efficient Market Hypothesis (EMH).

 

Most recurrent form of dividend announcement is in the form of cash. When a company has either contained the ideas regarding better investment alternatives in its hands, or is suffering from liquidity crunch, the company will not think it wise to give cash to the shareholders and the company will go for the other option that is bonus shares. Dividend announcement is one of the most important corporate announcements, as this does not only entail cash flow from company to shareholders but also send signals regarding companies’ present and future plans and performance. Why companies pay dividend at all and incur double taxation? This remained a debatable issue in the earlier financial research. But Hazak Aaro (2007) focused on level of market efficiency and argued that since managers have private and superior information which is not available to general public they use dividend announcement and payout to signal company’s present and future earning cash flow potential and consequently the magnitude of dividend increase/decrease the value of share.

 

The aim of this paper is to examine the stock price reaction to dividend announcement with a view of examining whether the Indian stock market is semi-strong efficient or not. The Event Study Methodology (Fama et al. 1969, Mc Williams, A. and Siegel, D. 1997) has been used to contribute further evidence on the efficiency characteristics of the Indian stock market.

 

LITERATURE REVIEW:

According to the dividend information content hypothesis, dividend changes trigger stock returns because they reflect changes in management’s assessment of a firm’s future profitability. This hypothesis has motivated a considerable amount of theoretical can empirical research. The general procedure used in prior research begins with classifying the dividend change announcement into either favorable or unfavorable. Ball, R. and Brown, P.(1968), Bhattacharya, S.(1979) and Bae Gil S. (2008) found out that the announcement increased (decreased) earnings over the previous year by a chaebol-affiliated firm had a positive (negative) effect on the abnormal return for the value -weighted portfolio of other non-announcing affiliates in the same group. Dasilas Apostolos (2008) investigated the stock market reaction of the Athens Stock Exchange to cash dividend announcements for the period 2000-2004. In particular, the study examined both the stock price and trading volume response to company announcements about dividend distributions. Fama et al. (1969) analyzed by market over and under reaction study and resulted both of them not much sustain market efficiency. IPO’s, M&A’s, Stock Splits, Proxy contests, Dividend, Bonus Issues etc studied by the author to study market efficiency and long run returns analyzed to determine market efficiency and returns. Hall, P. and Wilson, S.R. (1991) took a goal to improve the integrity of research that uses event study methodology through their manuscript. Hazak Aaro (2007) presented a theoretical model on dividend policy for distributed profit taxation which is the corporate taxation regime of Estonia. Kato, K. and Kanniainen Juho (2007) examined of stock return volatility by questioning the assumption that the conditional expectations of future dividends react to the same new information. Kanwal Anil (2008) observed profitability as always been considered as a primary indicator of dividend payout ratio. Apart from profitability, numerous other factors like cash flows, corporate tax, sales growth and market to book value ratio were also considered rampant. Khurana Rajesh and Warne, D.P. (2016) examined the bonus issue effect in Indian stock market (NSE 100). For analyzing the reaction during bonus issue announcement 34 companies from 11 sectors have been considered in the sample period from 2006 to 2012. The results indicate that there are significant positive abnormal returns for a eight day period prior to bonus issue announcement in line with evidence from developed stock market. Koerniadi Hardjo (2008) examined in their study whether managers deliberately used accruals to convey information regarding firm future profitability. The contemporaneous earnings and dividend announcement data was used as research setting as it reduced the possibility of opportunistic income smoothing by managers and hence increased the validity of the inference on the accrual signaling hypothesis.

 

Kumar Praveen (2006) derived a conditional CAPM in a general equilibrium model where investors faced estimation risk on mean returns and learnt from information of uncertain quality or precision. McWilliams, A. and Siegel, D. (1997) provide a good starting point for providing guidance in the use of event study methodology, our revised recommendations add additional value beyond McWilliams and Siegel by being more consistent with statistical theory, existing research results and accepted practice. Murray, D. (1985) analyzed the stock split announcement and execution effect in the stock market. The results regarding trading volume and daily turnover led to negation of improvement in liquidity after stock splits. The study couldn’t corroborate the trading reange hypothesis as possible explanation of stocks splits. Padgett Carol (2007) tested the signaling and free cash flow hypothesis of the information content of share repurchases using UK open market share repurchases between January 1999 and December 2004. The five day mean announcement abnormal return of the sample was low at 1.28% but it was statistically significant at the 5% level. Servaes Henri (2008) studied responses of industry when another firm in the same industry was put to a hostile takeover attempt. The study documented some major responses i.e. the industry peers cut their capital expenses, free cash flows, cash holdings, increased their leverage and payouts to shareholders. Subramani Mani R. (2002) examined the returns to e-commerce events in the period from 1999 to 2000 which employed a set of short time windows (1 day, 5 days, 10 days bracketing the event) as well as a set of long event windows (6 months, 9 months and 1 year from the event). The results reflected little consistency between abnormal returns in short 1 day, 5 days and 10 days event windows. In contrast, the abnormal returns observed in 6, 9 and 12 months windows were reasonably consistent.

 

DATA AND METHODOLOGY:

Data and Sample:

The initial sample consisted of 100 companies (500 events) of dividend announcements (from 14 different sectors) listed on the NSE 100 in the sample period from 2006 to 2015. But only 40 companies (245 events) fulfilled the selection criteria for the study therefore this study is based on 40 companies with 245 events from 14 different sectors. The information regarding dividend announcement dates, daily price of companies as well as of NSE 100 are obtained from CMIE Prowess Database and from NSE websites. First media announcements date is defined as the event date. This approach was taken on the assumption that the information was first known to the market on the event date only.

 

Announcement Effects

The study used the event study methodology to examine the market reaction to dividend announcement on stock prices by using daily adjusted prices for sample stocks for 115 days prior and 15 days after the event date. The respective media announcement dates of dividend are obtained from CMIE Prowess Database, along with the necessary share price data and the value of the NSE 100 index. The procedure adopted in using the Event Study Methodology is also discussed.

 

Estimation Procedure

The purpose of our study is to determine whether there is any abnormal return around the event window and how fast the information is absorbed in the security prices. For the purpose of the study, we constructed null hypothesis (H₀) as follows:

 

(H₀) There are no significant average abnormal returns (AAR) around the dividend announcements date i.e. 1/n ∑AR = 0 Where n is the number of sample companies.

NSE 100 index is used as a proxy for the market portfolio. In order to carry out an event study, we determine the event window as t = -15 to t = +15 relative to the event day t = 0 (date of dividend announcement). An estimation period of -115 to -16 days is used for computing expected returns using market model given in equation 3.

 

The daily returns for each sample company have been computed for the estimation window period and also for the event window period as:

R_it = (P_it – P_it-1) / P_it-1                                                     …(1)

 

Where, P_it and P_it-1 are respective daily prices for company i at time t and t-1 . Analogously, the actual returns for the market are also computed as:

R_mt = (I_t – I_t-1) / I_t-1                                                         …(2)

 

Where, I_t  and I_t-1 are daily index values at time t and t-1 respectively.

 

The expected returns on a stock have been estimated using the market model given in the following equation:

R_it = α_i + β_i R_mt  + ɛ_it                                                      …(3)

 

Where R_it is the observed daily return for the share of a company i at time t, R_mt is the observed daily return for the market index at time t, α_i is the estimate of the intercept for share of company i, β_i is the estimate for beta of share of company i, and ɛ_it is the independently and identically distributed residual error term.

 

In the next step we compute the “abnormal” returns for each of the sample company for the window period. Abnormal return is defined as the actual return minus the expected return. The abnormal return for company i on day t calculated as:

 

AR_it = R_it – α_i – β_i R_mt                                                  …(4)

 

In order to eliminate the effect of any one or group of securities on the abnormal returns, the ARs are averaged over the number of companies. The ARs of individual companies are averaged for each day surrounding the event-day (i.e., -15 to +15 days) using the following model:

 

 

 

With a view to know the cumulative effect of AARs on days surrounding the event the Cumulative Average Abnormal Return (CAAR) are calculated for event days t₁ through t₂ by summing the average abnormal returns for these days, that is:

 

 

 

Significant Test:

Standard deviation of abnormal returns for the estimation period -115 days to -16 days is computed first. Then the Standardized Abnormal Returns (SAR) for each company is obtained, by dividing abnormal returns of the event period (i.e., -15 to +15) by the standard deviation obtained. For event day t, the z-statistics for the Average Abnormal Returns (AARs) on N securities will be calculated as:

 

 

For testing cumulative excess returns for N securities over T days (event days t₁ through t₂) the Z-statistic is:

 

 

 

TABLE 1: Sector-wise Abnormality Returns: Auto and Banking Sectors

	AUTO				BANKING
Event Window	%AAR	Z VALUE	%CAAR	Z VALUE	%AAR	Z VALUE	%CAAR	Z VALUE
-15	-0.5788	-0.05188	-0.5788	-0.05188	0.354613	0.030429	0.354613	0.030429
-14	0.11132	0.012164	-0.46748	-0.02808	-0.20084	-0.01891	0.153776	0.01103
-13	-0.2815	-0.03247	-0.74898	-0.04168	-0.46642	-0.06619	-0.31264	-0.02097
-12	0.47058	0.046907	-0.2784	-0.01264	-0.7609	-0.06186	-1.07354	-0.04243
-11	0.163977	0.010086	-0.11442	-0.0068	0.092875	0.01191	-0.98066	-0.03377
-10	-0.4295	-0.04312	-0.54392	-0.02381	0.225254	0.026976	-0.75541	-0.02219
-9	-0.22631	-0.02199	-0.77023	-0.03035	-0.30947	-0.02934	-1.06488	-0.02924
-8	0.135707	0.017716	-0.63452	-0.02213	0.101642	0.010418	-0.96324	-0.02446
-7	0.146514	0.007635	-0.48801	-0.01832	0.189893	0.019063	-0.77335	-0.01808
-6	1.012658	0.088449	0.52465	0.010592	0.473355	0.044939	-0.29999	-0.006
-5	0.068495	0.005724	0.593145	0.011825	-0.2489	-0.02471	-0.54889	-0.01157
-4	-0.0198	-0.00239	0.573341	0.010632	0.351317	0.020958	-0.19757	-0.00633
-3	0.21605	0.022138	0.78939	0.016355	-0.05844	-0.00696	-0.25601	-0.0076
-2	-0.54435	-0.04097	0.245043	0.00481	0.188027	0.017788	-0.06798	-0.00359
-1	0.774316	0.078426	1.019359	0.024896	0.171805	0.014719	0.103821	-0.00049
0	-0.28895	-0.0231	0.730408	0.018332	0.009131	0.000626	0.112953	-0.00035
1	-1.34233	-0.07902	-0.61192	-0.00138	0.196996	0.016698	0.309949	0.002838
2	-0.98271	-0.07908	-1.59463	-0.01998	-0.49221	-0.03498	-0.18226	-0.00371
3	0.825913	0.057008	-0.76872	-0.00637	-0.08611	-0.00728	-0.26837	-0.00492
4	-0.10381	-0.01146	-0.87253	-0.00877	-0.20218	-0.02245	-0.47055	-0.00873
5	0.103633	0.007664	-0.76889	-0.00689	0.227367	0.01731	-0.24319	-0.00556
6	-0.29224	-0.03455	-1.06113	-0.0141	0.553347	0.059269	0.310162	0.00448
7	0.065829	0.007205	-0.9953	-0.01228	-0.15576	-0.01753	0.154407	0.001514
8	0.125188	0.010944	-0.87012	-0.00979	-0.02773	-0.00326	0.126672	0.000961
9	0.212254	0.022961	-0.65786	-0.005	0.35717	0.037633	0.483842	0.006846
10	-0.64706	-0.06437	-1.30492	-0.01753	-0.40362	-0.0396	0.080223	0.000621
11	-0.38822	-0.0504	-1.69313	-0.0269	0.162399	0.017694	0.242622	0.003281
12	-0.15261	-0.01862	-1.84574	-0.02993	0.268423	0.030448	0.511045	0.007735
13	0.50232	0.047282	-1.34342	-0.02063	-0.26197	-0.02355	0.24908	0.004171
14	0.893387	0.059468	-0.45004	-0.00943	0.21485	0.014998	0.463929	0.006249
15	-0.26742	-0.01676	-0.71745	-0.01229	0.016108	0.001542	0.480037	0.006364

Note: *Significant at 5% level of significance

 

The AAR on the event day for Auto and Banking sectors are -0.28% (insignificant negative AAR as Z value= 0.02) and 0.01% (very low and insignificant positive AAR as Z value = 0.0006) respectively can be observed. After a steep fall on the announcement day the market showed favorable trend on the day t₊₃ in case of Auto as well as of banking sector and from the day t₊₄  in case of both sectors the market behaved normally, Which indicating the acceptance of null hypothesis and the evidence of semi strong efficiency of the market.

 

TABLE 2: Sector-wise Abnormality Returns: Cement and Communication and Networking Sectors

	CEMENT				COMMUNICATION and NETWORKING
Event Window	%AAR	Z VALUE	%CAAR	Z VALUE	%AAR	Z VALUE	%CAAR	Z VALUE
-15	-0.72896	-0.11921	-0.72896	-0.11921	-0.50997	-0.21306	-0.50997	-0.21306
-14	-0.22066	-0.02324	-0.94962	-0.10073	1.131599	0.669452	0.621627	0.322718
-13	-0.60112	-0.06828	-1.55073	-0.12167	0.038561	0.016653	0.660188	0.273113
-12	0.969501	0.109818	-0.58123	-0.05046	-0.74506	-0.30081	-0.08487	0.086117
-11	0.539462	0.070178	-0.04177	-0.01375	0.947969	0.396181	0.863097	0.254203
-10	1.138034	0.158718	1.096264	0.052249	0.04193	0.035356	0.905027	0.246489
-9	-0.04425	-0.00767	1.052018	0.045475	-0.48725	-0.30194	0.417775	0.114083
-8	-0.55525	-0.16866	0.496764	-0.01709	0.592142	0.549063	1.009917	0.300839
-7	0.05163	0.006524	0.548394	-0.01394	-2.39781	-0.19649	-1.38789	0.218137
-6	-0.10535	-0.01758	0.44304	-0.01878	1.776426	0.233262	0.388536	0.280707
-5	0.73897	0.085022	1.18201	0.007726	0.807216	0.217713	1.195752	0.333287
-4	-0.56007	-0.13213	0.621942	-0.03074	-1.89483	-0.65089	-0.69907	0.131202
-3	-0.28951	-0.04435	0.33243	-0.04184	1.269128	0.221086	0.570054	0.187373
-2	0.381849	0.071045	0.71428	-0.02133	-0.14876	-0.14366	0.421295	0.142163
-1	2.30355	0.126919	3.017829	0.012163	-0.24867	-0.15709	0.172625	0.096781
0	-0.42396	-0.0551	2.593869	-0.00199	-0.1633	-0.0402	0.009328	0.083661
1	-0.32831	-0.03821	2.265559	-0.0112	-1.01839	-0.24556	-1.00906	0.021607
2	0.368363	0.058198	2.633921	0.002836	-0.15426	-0.02108	-1.16332	0.01603
3	1.037191	0.157437	3.671113	0.038879	0.766605	0.270102	-0.39671	0.077568
4	0.360874	0.051881	4.031986	0.049495	0.488391	0.104314	0.091676	0.098929
5	0.869516	0.140133	4.901502	0.078882	0.8041	0.274094	0.895776	0.156357
6	0.674378	0.100816	5.57588	0.098562	-0.15037	-0.087	0.745407	0.134213
7	0.315667	0.050349	5.891547	0.106894	1.460361	0.420178	2.205767	0.218876
8	0.090899	0.012656	5.982446	0.107227	0.804425	0.414676	3.010192	0.298913
9	0.532227	0.071489	6.514673	0.119359	-1.56206	-0.49838	1.448137	0.193198
10	-0.71016	-0.11117	5.804514	0.095239	-1.96097	-0.21247	-0.51283	0.147777
11	0.984876	0.136886	6.78939	0.119803	0.257146	0.118091	-0.25568	0.167741
12	0.81041	0.119035	7.5998	0.140139	-1.4491	-0.12967	-1.70478	0.140214
13	-0.17115	-0.04176	7.42865	0.129947	-1.22904	-0.16942	-2.93382	0.106315
14	0.681063	0.153485	8.109712	0.155785	0.531928	1.383141	-2.40189	0.357054
15	-0.59493	-0.07991	7.514784	0.138899	-1.43394	-0.40541	-3.83583	0.278433

Note: *Significant at 5% level of significance

The AAR on the event day for Cement and Communication and Networking sectors are -0.42% (insignificant negative AAR as Z value= 0.06) and -0.16% (insignificant negative AAR as Z value = 0.04) respectively can be observed. After a steep fall on the announcement day the market showed favorable trend on the day t₊₁ in case of Cement and on the day t₊₂ in case of Communication and Networking sector and from the day t₊₄ in case of both sectors the market behaved normally, indicating the acceptance of null hypothesis and the evidence of semi strong efficiency of the market.

 

TABEL 3: Sector-wise Abnormality Returns: Electronic and Energy Sectors

	ELECTRONIC				ENERGY
EVENT WINDOW	%AAR	Z VALUE	%CAAR	Z VALUE	%AAR	Z VALUE	%CAAR	Z VALUE
-15	1.088171	0.094694	1.088171	0.094694	-0.74289	-0.09392	-0.74289	-0.09392
-14	1.17142	0.141303	2.259591	0.166875	-0.94316	-0.18816	-1.68605	-0.19946
-13	-0.48632	-0.25145	1.773271	-0.00892	-0.24337	-0.0374	-1.92942	-0.18445
-12	-0.79652	-0.20608	0.976755	-0.11077	0.627493	0.057444	-1.30193	-0.13102
-11	-0.02797	-0.00421	0.948782	-0.10096	0.263791	0.066743	-1.03814	-0.08734
-10	0.229132	0.037178	1.177914	-0.07698	0.878147	0.115587	-0.15999	-0.03254
-9	0.118894	0.058149	1.296807	-0.04929	0.351521	0.046927	0.191532	-0.01239
-8	1.106338	0.190355	2.403145	0.02119	-0.16173	-0.02609	0.029798	-0.02081
-7	-0.47298	-0.07735	1.930167	-0.00581	0.051659	0.00773	0.081457	-0.01704
-6	-0.14845	-0.04321	1.781715	-0.01917	-0.17644	-0.02448	-0.09498	-0.02391
-5	0.486437	0.063603	2.268152	0.000897	0.206242	0.038492	0.111261	-0.01119
-4	-0.87797	-0.13499	1.390182	-0.03811	-0.27844	-0.0496	-0.16717	-0.02503
-3	-0.47193	-0.07989	0.918252	-0.05877	0.516045	0.088662	0.34887	0.000538
-2	-0.51418	-0.09987	0.404074	-0.08332	-0.3285	-0.05607	0.020374	-0.01447
-1	1.310907	0.165411	1.71498	-0.03779	0.540965	0.080484	0.561339	0.006804
0	-0.81105	-0.07634	0.903929	-0.05569	-0.59354	-0.103	-0.0322	-0.01916
1	-6.04508	-0.44677	-5.14115	-0.16238	-0.99822	-0.09813	-1.03042	-0.04239
2	-0.83012	-0.12738	-5.97127	-0.18783	-1.17971	-0.15331	-2.21013	-0.07733
3	0.015286	0.004792	-5.95598	-0.18172	-0.66724	-0.11135	-2.87737	-0.10081
4	-1.57993	-0.216	-7.53591	-0.22542	-0.5526	-0.08132	-3.42997	-0.11644
5	0.23042	0.026489	-7.30549	-0.21421	0.579885	0.081029	-2.85009	-0.09596
6	-1.03109	-0.2005	-8.33659	-0.25203	1.281824	0.155811	-1.56826	-0.06053
7	-0.36793	-0.11544	-8.70451	-0.27056	-0.51558	-0.04622	-2.08384	-0.06884
8	0.360629	0.103274	-8.34388	-0.24378	0.629961	0.123154	-1.45388	-0.04225
9	0.003391	0.001183	-8.34049	-0.23862	-1.22663	-0.21417	-2.68051	-0.08423
10	2.766217	0.251473	-5.57428	-0.18467	0.306572	0.090803	-2.37394	-0.06479
11	1.399749	0.138934	-4.17453	-0.15448	-0.64332	-0.1245	-3.01726	-0.08754
12	-0.64934	-0.10826	-4.82386	-0.17215	-0.17517	-0.02376	-3.19244	-0.09045
13	-0.2554	-0.03374	-5.07927	-0.17542	-0.06872	-0.01157	-3.26115	-0.09103
14	1.277384	0.167377	-3.80188	-0.14192	0.174589	0.021863	-3.08657	-0.0855
15	0.477626	0.101345	-3.32426	-0.12141	0.018588	0.002173	-3.06798	-0.08372

Note: *Significant at 5% level of significance

 

The AAR on the event day for Electronics and Energy sectors are -0.81% (insignificant negative AAR as Z value= 0.08) and -0.59% (insignificant negative AAR as Z value = 0.10) respectively can be observed. After a steep fall on the announcement day the market showed favorable trend on the day t₊₂ in case of Electronics and on the day t₊₃  in case of Energy sector and  from the day t₊₄ in case of Electronics sector and from the day t₊₆  in case of Energy sector the market behaved normally, indicating the acceptance of null hypothesis and the evidence of semi strong efficiency of the market.

 

TABLE 4: Table: 5.5 Sector-wise Abnormality Returns: Financial Services and FMCG Sectors

	FINANCIAL SERVICES				FMCG
Event Window	%AAR	Z VALUE	%CAAR	Z VALUE	%AAR	Z VALUE	%CAAR	Z VALUE
-15	1.613912	0.259371	1.613912	0.259371	0.251542	0.028556	0.251542	0.028556
-14	0.05864	0.014666	1.672552	0.193774	-0.10564	-0.01038	0.145906	0.012849
-13	0.402669	0.095048	2.075221	0.213091	-0.60632	-0.07253	-0.46042	-0.03139
-12	-0.9843	-0.27028	1.090919	0.049402	-0.01723	-0.00226	-0.47765	-0.02831
-11	0.243824	0.058875	1.334743	0.070516	-0.26394	-0.05646	-0.74159	-0.05057
-10	0.300298	0.073233	1.635041	0.094269	-1.41074	-0.29209	-2.15232	-0.16541
-9	0.214534	0.087883	1.849574	0.120493	-0.01528	-0.00409	-2.16761	-0.15469
-8	0.302363	0.078355	2.151937	0.140414	-0.17594	-0.02577	-2.34355	-0.15381
-7	0.22064	0.078585	2.372577	0.158578	-0.23602	-0.06986	-2.57956	-0.1683
-6	1.086925	0.213758	3.459502	0.218037	-0.03151	-0.00741	-2.61108	-0.16201
-5	0.441334	0.089639	3.900835	0.234917	0.70488	0.083589	-1.9062	-0.12926
-4	0.689668	0.168265	4.590504	0.27349	0.24959	0.045629	-1.65661	-0.11059
-3	0.556393	0.11326	5.146897	0.294173	-0.89498	-0.11561	-2.55159	-0.13832
-2	-0.93255	-0.20099	4.21435	0.229757	0.620589	0.127488	-1.931	-0.09921
-1	0.239322	0.039244	4.453672	0.232099	-0.59119	-0.14967	-2.52219	-0.13449
0	0.383371	0.039447	4.837043	0.23459	-0.01157	-0.0011	-2.53376	-0.1305
1	-1.3422	-0.19494	3.494845	0.180306	-0.07077	-0.00743	-2.60453	-0.1284
2	-1.75904	-0.35334	1.735807	0.091943	-1.78716	-0.24372	-4.39169	-0.18223
3	0.003879	0.001498	1.739686	0.089835	-0.60503	-0.07691	-4.99672	-0.19501
4	-0.36578	-0.10946	1.373909	0.063083	-0.43591	-0.19128	-5.43262	-0.23285
5	-0.18207	-0.10443	1.191837	0.038776	0.165196	0.039142	-5.26743	-0.21869
6	1.173503	0.163206	2.36534	0.07268	0.784367	0.117823	-4.48306	-0.18855
7	1.715726	0.258591	4.081066	0.125002	-0.07793	-0.00932	-4.56099	-0.18634
8	-0.10111	-0.03438	3.979958	0.115353	0.503846	0.064239	-4.05714	-0.16931
9	1.64311	0.273701	5.623069	0.167763	0.081728	0.022054	-3.97542	-0.16148
10	1.147744	0.187232	6.770813	0.201224	0.10806	0.010867	-3.86735	-0.15621
11	-1.02815	-0.2628	5.742661	0.146887	-0.95877	-0.10249	-4.82612	-0.17301
12	-0.3023	-0.02967	5.440358	0.138634	-0.65022	-0.07739	-5.47634	-0.18452
13	-0.47059	-0.07933	4.969765	0.121491	0.250431	0.065248	-5.22591	-0.1692
14	2.546681	0.243942	7.516446	0.163987	-0.48856	-0.10694	-5.71447	-0.18588
15	0.247715	0.04406	7.764162	0.169233	0.102816	0.045488	-5.61165	-0.17468

Note: *Significant at 5% level of significance

 

The AAR on the event day for Financial Services and FMCG sectors are 0.38% (insignificant positive AAR as Z value= 0.04) and -0.01% (very low and insignificant negative AAR as Z value = 0.001) respectively can be observed. The market showed an upward trend since the day t_-6 till the day t₀ (except on the day t_-2) raise a doubt of leak out some information before the announcement day. After a steep fall on the day t₊₁ and t₊₂ the market showed favorable trend on the day t₊₃ in case of Financial Services whereas favorable trend is observed on the announcement day and on the day t₊₂ there was a steep fall is observed  in case of FMCG sector. From the day t₊₅ in case of Financial Services sector and from the day t₊₄  in case of FMCG sector the market behaved normally, indicating the acceptance of null hypothesis and the evidence of semi strong efficiency of the market.

 

TABLE 5: Sector-wise Abnormality Returns: Industrial and IT Sectors

	INDUSTRIAL				IT
EVENT WINDOW	%AAR	Z VALUE	%CAAR	Z VALUE	%AAR	Z VALUE	%CAAR	Z VALUE
-15	-0.29601	-0.02228	-0.29601	-0.02228	0.12846	0.013784	0.12846	0.013784
-14	-0.12514	-0.0111	-0.42115	-0.0236	-0.43848	-0.03897	-0.31002	-0.01781
-13	0.044617	0.002896	-0.37654	-0.0176	0.419175	0.044567	0.109159	0.011188
-12	0.15008	0.011144	-0.22645	-0.00967	0.178153	0.013803	0.287313	0.01659
-11	-0.24555	-0.01541	-0.47201	-0.01554	0.014586	0.001549	0.301898	0.015531
-10	0.070486	0.00777	-0.40152	-0.01101	-0.03887	-0.00283	0.263024	0.013023
-9	0.019536	0.001472	-0.38198	-0.00964	-0.11893	-0.01159	0.144097	0.007676
-8	0.036785	0.002486	-0.3452	-0.00814	0.237662	0.023087	0.381759	0.015343
-7	0.277338	0.018741	-0.06786	-0.00143	-0.22835	-0.02172	0.153408	0.007226
-6	0.247288	0.017487	0.179428	0.004177	-0.54413	-0.05726	-0.39072	-0.01125
-5	-0.33276	-0.02169	-0.15333	-0.00256	0.075516	0.006817	-0.3152	-0.00867
-4	0.178071	0.01267	0.024741	0.001209	0.112139	0.012082	-0.20306	-0.00482
-3	-0.69558	-0.04679	-0.67084	-0.01181	-0.14939	-0.01544	-0.35245	-0.00891
-2	0.503612	0.028857	-0.16722	-0.00367	0.963229	0.091924	0.610776	0.015983
-1	0.011827	0.000953	-0.1554	-0.0033	0.200356	0.012773	0.811132	0.018739
0	0.235892	0.01172	0.080494	-0.00027	-1.09324	-0.0825	-0.28211	-0.00248
1	-0.22888	-0.01317	-0.14839	-0.00345	-0.28852	-0.01286	-0.57063	-0.00553
2	0.239515	0.016938	0.091125	0.000636	0.515228	0.042927	-0.0554	0.004748
3	-0.04237	-0.00292	0.04876	-5.1E-05	-0.02312	-0.00193	-0.07852	0.004178
4	-0.70771	-0.04554	-0.65895	-0.01023	-0.25617	-0.02492	-0.33469	-0.0015
5	0.425183	0.01668	-0.23377	-0.00635	-0.02996	-0.00282	-0.36465	-0.00208
6	-0.153	-0.01025	-0.38677	-0.00839	0.800886	0.061675	0.436233	0.011117
7	0.650918	0.026023	0.264144	-0.00277	-0.13761	-0.01402	0.298628	0.007948
8	-1.52399	-0.07348	-1.25985	-0.01771	-0.27756	-0.02353	0.021064	0.002978
9	-0.94036	-0.05513	-2.20021	-0.02838	-0.59349	-0.04394	-0.57242	-0.00587
10	-0.66012	-0.04002	-2.86033	-0.03568	-0.2621	-0.0174	-0.83452	-0.00917
11	0.17609	0.009925	-2.68424	-0.0331	-0.7319	-0.0825	-1.56641	-0.02487
12	-0.45279	-0.03194	-3.13703	-0.03854	-0.03493	-0.00244	-1.60134	-0.02489
13	0.263033	0.015703	-2.874	-0.03496	-0.14906	-0.01052	-1.75041	-0.02641
14	0.298603	0.024155	-2.57539	-0.02996	0.195297	0.013136	-1.55511	-0.02357
15	-0.17303	-0.01103	-2.74842	-0.03145	-0.42044	-0.04263	-1.97555	-0.03084

Note: *Significant at 5% level of significance

 

The AAR on the event day for Industrial and IT sectors are 0.24% (insignificant positive AAR as Z value= 0.01) and -1.09% (insignificant negative AAR as Z value = 0.08) respectively can be observed. On the day t₊₀  market react favorably but soon after a steep fall observed on the days t_+1, t₊₃ and t₊₄  in case of Industrial sector whereas in case of IT sector a correction can be observed on the day t₀ as compare to t_-2. From the day t₊₄  in case of Industrial sector and from the day t₊₆  in case of IT sector the market behaved normally, indicating the acceptance of null hypothesis and the evidence of semi strong efficiency of the market.

 

TABLE 6: SECTOR Sector-wise Abnormality Returns: Oil and Gas and Paint and Chemical Sectors

	OIL and GAS				PAINT and CHEMICAL
EVENT WINDOW	%AAR	Z VALUE	%CAAR	Z VALUE	%AAR	Z VALUE	%CAAR	Z VALUE
-15	-0.12717	-0.01336	-0.12717	-0.01336	-1.90033	-0.22265	-1.90033	-0.22265
-14	-0.43281	-0.03928	-0.55998	-0.03722	-0.07479	-0.02353	-1.97512	-0.17408
-13	0.049936	0.004832	-0.51004	-0.0276	-0.50996	-0.13475	-2.48508	-0.21993
-12	-0.14706	-0.02294	-0.6571	-0.03537	-0.38462	-0.09366	-2.86969	-0.2373
-11	-0.2204	-0.02534	-0.87751	-0.04297	-0.33625	-0.05122	-3.20594	-0.23515
-10	-0.30811	-0.04253	-1.18561	-0.05659	-1.37576	-0.16985	-4.5817	-0.284
-9	-0.36725	-0.03226	-1.55286	-0.06459	-0.91066	-0.16688	-5.49236	-0.32601
-8	-1.01878	-0.07749	-2.57164	-0.08781	0.297133	0.105583	-5.19523	-0.26763
-7	0.28786	0.028996	-2.28378	-0.07313	-0.99982	-0.17957	-6.19504	-0.31218
-6	-0.14267	-0.01049	-2.42645	-0.07269	-0.22794	-0.01918	-6.42298	-0.30222
-5	0.117323	0.010279	-2.30913	-0.06621	-1.12837	-0.26054	-7.55135	-0.36672
-4	0.117925	0.008199	-2.1912	-0.06102	-0.34618	-0.1269	-7.89753	-0.38774
-3	-0.24424	-0.02213	-2.43544	-0.06477	0.721939	0.103152	-7.17559	-0.34392
-2	0.574215	0.062328	-1.86123	-0.04575	-0.73393	-0.08238	-7.90952	-0.35342
-1	-0.46122	-0.0498	-2.32244	-0.05706	-0.52052	-0.19685	-8.43005	-0.39227
0	-0.56332	-0.0417	-2.88576	-0.06567	-1.85766	-0.26294	-10.2877	-0.44555
1	-1.02357	-0.09847	-3.90933	-0.08759	0.832999	0.076902	-9.4547	-0.41359
2	-0.40792	-0.04022	-4.31725	-0.09461	-0.6617	-0.11558	-10.1164	-0.42918
3	-0.4545	-0.06138	-4.77175	-0.10616	0.83795	0.179691	-9.27845	-0.37651
4	-0.21781	-0.02139	-4.98956	-0.10826	2.027395	0.205966	-7.25106	-0.32092
5	0.237659	0.027162	-4.7519	-0.09972	-2.98374	-0.30738	-10.2348	-0.38026
6	0.515647	0.057804	-4.23626	-0.08511	-1.29403	-0.22153	-11.5288	-0.41875
7	-0.07643	-0.00808	-4.31269	-0.08492	-0.48282	-0.08186	-12.0116	-0.42661
8	-0.54737	-0.0563	-4.86006	-0.09462	0.190836	0.04981	-11.8208	-0.40746
9	-1.32049	-0.08276	-6.18055	-0.10926	1.333879	0.17238	-10.4869	-0.36475
10	-0.03346	-0.00324	-6.21401	-0.10778	-0.0268	-0.00697	-10.5137	-0.35904
11	-0.51087	-0.05741	-6.72487	-0.11681	-2.11135	-0.20947	-12.6251	-0.39264
12	0.86885	0.09434	-5.85602	-0.09688	-0.35521	-0.13695	-12.9803	-0.41144
13	-0.34449	-0.02986	-6.20051	-0.10074	0.602522	0.166615	-12.3778	-0.37335
14	0.417881	0.042643	-5.78263	-0.09126	-0.81404	-0.31373	-13.1918	-0.42435
15	-0.52755	-0.03158	-6.31018	-0.09545	-0.34439	-0.08318	-13.5362	-0.43239

Note: *Significant at 5% level of significance

 

The AAR on the event day for Oil and Gas and Paint and Chemical sectors are -0.56% (insignificant negative AAR as Z value= 0.04) and -1.86% (insignificant negative AAR as Z value = 0.26) respectively can be observed. After a steep fall on the announcement day the market showed favorable trend on the day t₊₂ (continue till the day t₊₅ ) in case of Oil and Gas and on the day t₊₁ in case of Paint and Chemical sector and  from the day t₊₆ in case of  Oil and Gas sector and from the day t₊₅  in case of Paint and Chemical sector the market behaved normally, indicating the acceptance of null hypothesis and the evidence of semi strong efficiency of the market.

 

TABLE 7: Sector-wise Abnormality Returns: Pharmaceutical and Realty Sectors

	PHARMACEUTICAL				REALTY
Event Window	%AAR	Z VALUE	%CAAR	Z VALUE	%AAR	Z VALUE	%CAAR	Z VALUE
-15	-0.31189	-0.04461	-0.31189	-0.04461	0.451442	0.063779	0.451442	0.063779
-14	-0.34069	-0.0605	-0.65258	-0.07432	-0.88443	-0.12836	-0.43299	-0.04567
-13	-0.15873	-0.0296	-0.81131	-0.07778	-0.95618	-0.17149	-1.38917	-0.13629
-12	-0.0795	-0.00857	-0.89081	-0.07164	0.827573	0.217319	-0.56159	-0.00938
-11	-0.09195	-0.01066	-0.98276	-0.06884	-0.73711	-0.13525	-1.2987	-0.06887
-10	-0.15604	-0.01813	-1.1388	-0.07025	2.130779	0.231245	0.832077	0.031537
-9	0.305674	0.062308	-0.83313	-0.04149	-1.15874	-0.25623	-0.32666	-0.06765
-8	0.223065	0.022942	-0.61006	-0.03069	0.513904	0.094844	0.187241	-0.02975
-7	-0.41673	-0.05226	-1.02679	-0.04636	0.09808	0.020806	0.285321	-0.02111
-6	-0.46447	-0.04973	-1.49126	-0.05971	-1.46839	-0.21013	-1.18307	-0.08648
-5	0.086763	0.012895	-1.4045	-0.05304	-1.54351	-0.31589	-2.72658	-0.1777
-4	0.008798	0.001018	-1.3957	-0.05049	0.215848	0.045021	-2.51073	-0.15714
-3	0.846066	0.079502	-0.54964	-0.02646	0.692201	0.159113	-1.81853	-0.10684
-2	-0.20367	-0.02015	-0.75331	-0.03088	-0.0115	-0.00219	-1.83003	-0.10354
-1	-1.03869	-0.09051	-1.792	-0.05321	0.028065	0.014481	-1.80196	-0.09629
0	-0.40656	-0.05527	-2.19856	-0.06533	0.88495	0.166402	-0.91701	-0.05163
1	-0.37389	-0.03309	-2.57245	-0.07141	-0.43925	-0.11077	-1.35626	-0.07696
2	-0.10166	-0.01065	-2.67411	-0.07191	-0.59343	-0.11891	-1.94969	-0.10281
3	-0.04354	-0.00364	-2.71765	-0.07082	0.136478	0.020035	-1.81321	-0.09548
4	0.440341	0.043667	-2.27731	-0.05926	-0.10612	-0.0299	-1.91933	-0.09974
5	0.356038	0.050561	-1.92127	-0.0468	-1.40537	-0.31922	-3.3247	-0.167
6	0.776275	0.082004	-1.145	-0.02824	1.059602	0.175693	-2.2651	-0.1257
7	0.064743	0.009282	-1.08026	-0.02569	-0.26762	-0.07673	-2.53271	-0.13894
8	0.079096	0.009652	-1.00116	-0.02318	-0.02817	-0.00541	-2.56088	-0.13712
9	0.223236	0.021295	-0.77792	-0.01845	-0.18936	-0.04605	-2.75024	-0.14356
10	-0.93077	-0.15537	-1.70869	-0.04856	0.981718	0.186192	-1.76852	-0.10425
11	0.562348	0.066114	-1.14635	-0.03493	0.308585	0.059507	-1.45994	-0.09085
12	-0.13162	-0.01586	-1.27797	-0.0373	0.104199	0.041541	-1.35574	-0.08136
13	-0.24996	-0.04584	-1.52793	-0.04516	-0.93547	-0.09566	-2.29121	-0.09771
14	0.484973	0.053569	-1.04295	-0.03462	-0.78614	-0.14068	-3.07735	-0.12175
15	0.470217	0.054798	-0.57274	-0.02422	0.997436	0.236611	-2.07991	-0.07728

Note: *Significant at 5% level of significance

 

The AAR on the event day for Pharmaceutical and Realty sectors are -0.41% (insignificant negative AAR as Z value= 0.05) and 0.89% (insignificant positive AAR as Z value = 0.16) respectively can be observed. On the day t₊₀ market react favorably to the dividend offering and leads to the market till the day t₊₆ but soon after a steep fall observed on the days t₊₇ in case of Pharmaceutical sector whereas in case of Realty sector the market lost its gaining position on the next day to announcement i.e. on the day t_+1. From the day t_+7, in case of Pharmaceutical sector and from the day t₊₆ in case of Realty sector the market behaved normally, indicating the acceptance of null hypothesis and the evidence of semi strong efficiency of the market.

 

Analysis of sector wise effect of announcement:

However the researches in the past have documented a significantly positive abnormal return on the event day i.e. on dividend announcement day. But this study showed a mixed reaction as only four out of 14 sectors i.e. Banking, Industrial, Financial Services and Reality sectors have shown insignificant positive abnormal returns on the announcement day. Ten sectors i.e. Energy, FMCG, Auto, Cement, Communication and Networking, Electronics, IT, Oil and Gas, Paint and Chemical and Pharmaceutical sectors showed an insignificant negative abnormal returns. It depicts that investors didn’t earn a abnormal returns from the market immediately after the dividend announcement because there will be no any information to which market react abnormally. From the above analysis it can also be said that the market react to dividend announcement for a short period of time and afterwards it behave normally indicating the acceptance of our Null Hypothesis (H₀) that there is no significant abnormal returns (AAR) around the dividend announcement date.

 

Table 8: Average Abnormal Returns (AARs) and Cumulative Average  Abnormal Returns (CAARs) of sample events Around Dividend Announcement Dates

Pre-announcement Period	%AAR	Z value	%CAAR	Z value
-15	-0.126758625	-0.003759614	-0.126758625	-0.003759614
-14	-0.200675613	-0.006327565	-0.327434237	-0.007132713
-13	-0.161148256	-0.005499176	-0.488582494	-0.008998787
-12	-0.019398738	-0.000572633	-0.507981231	-0.008079495
-11	-0.020241309	-0.000624413	-0.52822254	-0.007505766
-10	0.036607507	0.001170492	-0.491615033	-0.006373944
-9	-0.135587673	-0.004598789	-0.627202706	-0.007639304
-8	-0.011565347	-0.000368285	-0.638768053	-0.007276123
-7	-0.000103394	-2.83091E-06	-0.638871447	-0.006860938
-6	0.113281862	0.003193234	-0.525589585	-0.005499068
-5	-0.026514196	-0.000785874	-0.552103781	-0.005480106
-4	0.041741038	0.001182478	-0.510362742	-0.00490545
-3	-0.058446466	-0.001798034	-0.568809208	-0.005211689
-2	0.183045776	0.005277775	-0.385763432	-0.003611565
-1	0.142238671	0.003691747	-0.243524761	-0.002535898
Announcement day	%AAR	Z value	%CAAR	Z value
0	-0.281733776	-0.006672892	-0.525258537	-0.004123596
Post-announcement Period	%AAR	Z value	%CAAR	Z value
1	-0.574169818	-0.011922249	-1.099428355	-0.006892045
2	-0.339365019	-0.009194489	-1.438793374	-0.008865026
3	0.043660072	0.001254105	-1.395133302	-0.008340871
4	-0.203885921	-0.006228876	-1.599019223	-0.009522495
5	0.153166189	0.003735912	-1.445853034	-0.00847776
6	0.351035006	0.010564338	-1.094818028	-0.006030519
7	0.121219052	0.003234671	-0.973598976	-0.005223488
8	-0.288993804	-0.008202249	-1.26259278	-0.006787785
9	-0.265356635	-0.007122506	-1.527949415	-0.008075145
10	-0.283783696	-0.007665277	-1.811733111	-0.009421616
11	-0.123905832	-0.003598943	-1.935638944	-0.009938112
12	-0.022362528	-0.00065498	-1.958001471	-0.009882812
13	-0.063302177	-0.001805168	-2.021303648	-0.010046135
14	0.379550972	0.010088881	-1.641752676	-0.008035311
15	-0.138328169	-0.003788786	-1.780080845	-0.008585133

Note: *Significant at 5% level of significance

 

 

Figure1: AAR of Sample Events

 

Figure 2: CAAR of Sample Events

 

 

 

RESULTS:

Analysis of AAR of group events:

In an efficient market, if there is some information content associated with dividend announcement, then the same should be incorporated in the stock price on the announcement day. However the researches in the past have documented a significantly positive abnormal return on the event day i.e. on dividend announcement day. But this study documents dissimilar results. On the announcement day there is negative AAR of -0.28% which is very low and insignificant at 5% level (z value = 0.007). On the days t₊₁ and t₊₂ the market earn a insignificant negative AAR as observed,   z values have not exceeded the critical values. Whereas, on the day t₊₃ market earns a insignificant positive AAR [The market showed an increment of 0.32% from the day t₀ to t₊₃ and this upward trend continue till the day t₊₇ (except the day t₊₄ AAR = -0.20%)], it continues to build up to three days i.e. t_+5, t_{+6, and} t_+7. There are insignificant positive excess returns before run up to the dividend announcement date on the days t_-10, t_-6, t_-4, t_-2 and t_-1. It is surprise that there are insignificant –ve AAR is observed 10 times prior the announcement date and moreover there is not any single day around the event window when significant abnormal returns observed. In spite of positive AAR on the day t_-2 and t_-1 but due to insignificant returns at 5% level depicts that there was not any substantial leakage of information before the event.

 

Analysis of CAAR of sample events:

We observed a randomly trend in the prior event period i.e. from the day t_-15 to t_-2 the mean CAAR is -0.0049 and during this period fluctuation can be seen. From the day t_-12 to t_-1 the CAAR gradually drift up to 0.52%, but correction is observed on the day t₀ because, CCAR drop down to 115% (CAAR = -0.53%) which continue till the day t₊₂ (CAAR = -1.44%).  But from the day t₊₅ the market reacts positively and goes with the flow of the announcement till the day t_+7. However during the period under consideration investor initially appear to respond negatively to announcement of dividend offering, but the CAAR shows an upward trend shortly thereafter. On the event day a radical downfall to -0.53% can be observed on the event day i.e. t_0. The CAAR of -1.09% on the day t₊₁ decline to -1.59% by t₊₄ indicating the acceptance of our Null Hypothesis (H₀) that there is no significant abnormal returns (AAR) around the dividend announcement date.

 

CONCLUSIONS:

This study documents the market behavior around the dividend announcement date for 40 stocks (with 245 events) listed on the NSE 100 index over the period 2006-15. An event study was conducted using a 30 days event window. It was found that on an average the stocks start showing negative abnormal returns from the day t_-15 . On the announcement day (t₀) there is negative AAR of -0.28% which is very low and insignificant (z value = 0.007). In this study it is observed that the generally stocks doesn’t reacts immediately but gradually from the third or fourth day of the announcement. Out of 14 sectors none of the sector observed significant positive abnormal returns (AARs) on the announcement day. Thus there appears to be no announcement effect associated with dividend announcement in India. In general the behavior of AARs and CAARs are found to be in accordance with expectation, thereby lending support to the hypothesis that the Indian Stock market is Semi Strong Efficient.

 

 

 

 

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Received on 25.07.2017                Modified on 26.02.2018

Accepted on 02.03.2018           ©A&V Publications All right reserved