Article

STOCK PRICE REACTION TO DIVIDEND ANNOUNCEMENTS AND INFORMATION EFFICIENCY IN SRI LANKAN SHARE MARKET

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Abstract

This study attempts to examine stock price reaction to subsequent dividend announcements and information efficiency in Sri Lankan Share Market with a sample of 61 major companies from those listed on the Colombo Stock Exchange (CSE), which have made 137 dividend announcements for the period of 1999-2005. This study employs event study methodology. More specifically, it employs the market model in generating abnormal returns surrounding subsequent dividend announcements. Findings show that there is a considerable informational content of dividend announcements in Colombo Stock Exchange. The investors consider dividend announcements as favorable news. The stock price reacts positively to subsequent dividend announcements in Sri Lankan Capital Market. More specifically, dividend increase announcements support the information content of dividend hypothesis. Moreover, dividend decrease announcements and dividend no change announcements against with the information content of dividend hypothesis. In addition, the results in this study supported the semi-strong form of the efficient capital market hypothesis; that is, on the average, the stock market adjusts in an efficient manner to new dividend information. This research will be important to all those takes interest in the share market. Especially, it is more important to the investors, managers of the companies and stock exchange regulatory agencies in their decision-making.

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... The benefits of using the market model depend on the R2 of the market model regression. The higher the R2 the greater is the variance reduction of the abnormal return (Dharmarathne 2013). ...
... where, R it = return on company i on day t; R mt = return on a market portfolio of stock on day t; α i = intercept; β i = systematic risk of stock i (slope coefficient); ε it = disturbance term of the regression (Kleinow et al. 2014;Dharmarathne 2013); var(ε it ) = δ 2 , a constant; means residuals are homoscedastic. ...
... AAR = Average abnormal return on day t. (Rani et al. 2012;Dharmarathne 2013;Kleinow et al. 2014). ...
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In response to the financial crisis, a number of reforms to bank regulation have been introduced. Many of these reforms seek to improve the resilience of banks through making changes to their structure. In the U.K., the Banking Reform Act 2013 was enacted. This study attempts to examine the market’s reaction to this important financial reform, on the stock price of banks and insurance companies and contributes to the current regulatory debate. As reform proposals take time to get converted into Law, this paper focuses on three legislative events extracted from the Parliament website; the third reading at the House of Commons, the third reading at the House of Lords, and the Royal Assent, effectively the stages from which reform proposals convert to Law. This study employs an event study methodology, based on a sample consisting of 24 major banks and insurance companies listed on the London Stock Exchange (LSE) for which data are available from 30/11/2012 to 18/12/2013 covering all three events. The findings are that banks’ shares reacted positively, whereas insurance companies’ shares reacted negatively to the passage of the Banking Reform Act 2013 in the House of Commons (first event); insurance companies experienced negative returns, whereas banks’ returns did not react significantly in relation to the passage of the Act in the House of Lords (second event); and finally, banks’ shares reacted positively while insurance companies’ shares reacted negatively when the Act received the Royal Assent (third event). One of the main intentions of the Banking Reform Act 2013, was to contain the risk taken by banks. Market reaction on banks’ shares shows that the market accepted this; on the other hand, the negative effect on the shares of insurance companies would imply that insurance companies are perceived to have taken on some additional risk as a consequence of the Act.
... Moreover, trend of stock return which is positive before the ex-dividend date and negative afterwards supports the short-term trading hypothesis. Recently, Dharmarathne (2013) revealed that the stock price positively reacts to dividend announcements. Particularly, dividend increase announcements support the information content of dividend hypothesis. ...
... Our results show that the market reacts favorably to the announcements of dividend policy of the companies listed on the Vietnamese stock market. This result which is also consistent with the previous studies, e.g., Scott and Keith (1996), Aharony and Swary (1980) and Dharmarathne (2013), supports the information content of dividend hypothesis. Main window (-20,20) -0.0563 *** -12.1872 0.0000 (-20,-10) 0.0137 *** 5.7182 0.0000 (-20,-5) 0.0344 *** 11.9409 0.0000 (-20,-1) 0.0349 *** 10.6846 0.0000 Sub windows (-15,-5) 0.0315 *** 13.1876 0.0000 (-15,-1) 0.0316 *** 11.2982 0.0000 (-10,-5) 0.0230 *** 13.0512 0.0000 *** , ** and * represent significance at the 1%, 5% and 10%. ...
Article
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We study the impact of dividend policy on the stock return by investigating reaction of the stock price on the dividend announcement date and the ex-dividend date. In order to achieve this goal, a sample comprising 1962 observations of dividend-related events from 432 listed companies in Vietnam during the period 2008 to 2015 is chosen to analyze and the event study methodology is used to estimate abnormal returns to the shares around the announcement date and the ex-dividend date. Our 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.
... Finally, it confirmed that overall samples are not consistent with the semi-strong form of the efficient market hypothesis. Dharmarathne (2013) has attempted to examine the stock price reaction to subsequent dividend announcements and information efficiency in the CSE with a sample of 61 leading listed companies for the period of 1999-2005. The event study method was used. ...
Article
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Past literature shows inconsistent results when analyzing the impact on the external auditors' report (AR) and stock returns. Similarly, it was observed that there is less literature that examined the significance of the relationship between each type of five main categories of AR on stock returns. The purpose of this paper is to examine the stock return's reaction to different types of AR in Sri Lanka. The standard event study methodology, aiming on a short event window, was used to determine whether there is a significant reaction in stock returns to the announcement of audit report. The Average Abnormal Returns (AARs) and the Cumulative Average Abnormal Returns (CAARs) were analysed with t-test analyses to test the significance, for the five different categories of AR. The findings show that in the event study that AR with adverse opinion and disclaimer opinion have a significant positive impact on the stock returns where the positive direction is a novel finding which is a significant contribution to the literature. Nevertheless, there were no significant effects found from other opinions. Overall, this analysis concludes that the auditors' report has a less informative value to investors in the Sri Lankan context. The findings of this paper show the value of information content of the auditors' reports to investors, differentiating the various reactions based on each type of audit report issued.
... Further, Colombo Stock Exchange reacts in the same way to dividend increase, dividend decreases and no change in dividend. In addition, the results in this study supported the semi-strong form of the efficient capital market hypothesis; that is, on the average, the stock market adjusts in an efficient manner to new dividend information (Dharmarathne, 2013). ...
Article
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This paper discussed the effects of accounting information on the excess return of shari’ah stocks and conventional stocks using Fama and French Three Factor Model, and examined the reaction of the capital markets as a result of the dividend announcement. The results and data analysis had yielded 8 stock portfolios. It can be concluded that the AER variable movements had an immediate reaction to the movement, meaning that the dividend announcement brought the content of the information to the capital markets or it can be said that the Indonesian capital market conditions have started heading to a semi-strong form.
... The Variance of CAAR (equation 3.21) was also calculated and the Standard deviation being the square root of the variance. (Dharmarathne, 2013), (Bulla, 2016). However, for the Energy Sector, Insurance Sector and the NSE Market, the null Hypothesis, is accepted at 96% Confidence level, concluding that Dividend announcements have no impact on the behavior of stock prices for the two sectors and the market. ...
Article
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The objective of this study was to establish the effects of dividend announcement to current market prices at the Nairobi Securities Exchange, with four specific objectives; to determine the information content of dividend announcements, to determine the extent to which prices converge to new values after dividend announcements on a sector by sector basis, to establish the market reaction to announced information and also to establish whether investors can secure excess returns by acting on announced information. A 66 days event timeline was employed from 2005 to 2015 on daily closing stock prices. A sample of 179 dividend announcements from 22 listed companies in 8 sectors were drawn and analysed using an OLS Market Model. Findings of the research conclude that; dividend announcements do have an impact on stock prices for the Agricultural, Banking, Commercial, Construction, Manufacturing and Telecomm Sectors and not for the Energy Sector, Insurance Sector and the Nairobi Securities Exchange Market. It takes more than five days for prices to adjust to their correct values and this makes it possible for market players to profit from the inefficiency by earning abnormal returns. We conclude that the Nairobi Securities Exchange is not semi-strong form efficient.
... Aamir & Ali's (2011) study explains the dividend announcement in the oil, cement, and gas sectors listed on the Karachi Stock Exchange had a positive impact on the stock prices of companies and rival companies, both at the time of announcement and after the announcement. Through his research Dharmarathne (2013) adds that investors view dividend announcements as good news. Stock prices reacted positively after the dividend announcement on Sri Lankan Capital Market. ...
Article
This study aims to determine and analyze the impact of bad news and good news on changes in stock returns of the four state-owned banks of Indonesia, period 2018. The population of this study is consists of four state-owned banks in Indonesia. Using a saturated sampling technique obtained four sample companies. Event study used to examine abnormal return around good news and bad news press release (announcement) date. The analysis technique used is Statistics Descriptive, One Sample Kolmogorov-Smirnov, Paired Sample T-Test, and Wilcoxon Sign Rank Test. There is no significant difference between before and after the press release of bad news. From ninety-six press releases of good news, five press releases showed there is a significant differences between before and after the press release of good news.
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Article
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Recognizing the requirement of a comprehensive analysis of stock market response to the publicly available information, this study investigates the effect of information content in stock dividends, on stock returns in Colombo Stock Exchange (CSE). The empirical knowledge on this regard is limited as most of the previous studies concentrate on either very few numbers of events or they are limited by the method implemented. The event study method is frequently used with Market Model, Mean Adjusted Model, and Market-Adjusted Return Model previously. However, this study enlightens the event study method even by incorporating stock volatility clustering phenomenon to the Market Model. It is further extended with the application of time series modelling techniques. Taking the fact which is, especially availability of data this study has selected 27 stock dividends announcements for the period from 2004 to 2014 for this study. Results indicate that stock returns react positively to the stock dividend announcements in CSE. This is consistent with the information content theory. Further, presence of earlier or/and delayed significant abnormal returns indicates that stock prices do not reflect the publicly available information instantly and accurately. Therefore, CSE is not consistent with the semi-strong form efficiency hypothesis. Thus, this study intensifies the requirement of Securities and Exchange Commission's intervention for the efficient information dissemination in the CSE.
... For the banking industry,Ali & Chowdhury (2010)found that the dividend announcement has no impact on stock prices in Bangladeshi because bank insider trading does not transmit any information about stock prices. Some reverse opinions by Hoque,Mamun & Mamun (2013)in Dhaka Stock Exchange proposed that pre and post dividend announcement has no impression on stock prices.Recently, it is revealed byDharmarathne (2013)that the stock price positively reacts toward announcements of dividend as announcements of dividend boost it supports the knowledge content of the dividend but when announcements downturn then there is no change with content of dividend information. Menike (2014) explored stock price reaction towards the announcement of dividend. ...
Thesis
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The purpose of the study is to investigate the mediating role of Agency Factors on the relationship of Dividend Policy with Firm Characteristics. Agency factors used in this study are Institutional Ownership which represents the pattern of shareholding exercised by different firms while another factor is Free Cash Flows which are the corporation’s cash that can be distributed to creditors or stockholders. Firm Characteristics under study are Enterprise Value, Earning Per Share, Stock Return and Volatility. This study is conducted to examine the impact of Dividend Policy on Firm Characteristics under mediation of Institutional Ownership or Free Cash Flows of all PSX listed firms from Pakistan. For this purpose, 130 firms listed at Pakistan Stock Exchange have been selected for the period from 2008 to 2018 due to availability of data. The data is obtained from the firm’s annual financial statements and financial statements analysis published by the statistics department of State bank of Pakistan. The panel data (random effect) models have been used to investigate the mediating role of two different Agency Factors on relationship of Dividend Policy with Firm Characteristics. Dividend payout is used as independent variables to quantify the Dividend Policy of the firms. The results of the analysis showed that Free Cash Flows has no mediation on the relationship of Dividend Policy and all Firm Characteristics mentioned in this study. Institutional Ownership show no mediation in relation to Dividend Policy with Earning Per Share and Stock Return, but analysis proposed that Institutional Ownership show mediation on the relationship of Dividend Policy and Enterprise Value as well as Stock Volatility.
... Several studies in accounting and finance discuss the stock market reactions and dividend announcement. Allen et al. (2000), Frankfurter and Lane (1992), Aharony and Swary (1980) Asquth and Mullins (1983), Dyl and Weigand (1998), Dhillon and Johnson (1994) (also measured its effect on the bonds prices), Lonie et al. (1996), Amihud and Murgia (1997), Dharmarathne (2013), Michaely et al. (1995) and many others. In contrast, only a few studies discuss the association between the trade volume and dividend initiation 8 and there is very little work explaining how investors are taking their positions in the financial market and how they are making their trading strategies (Bamber, 1987;Kim and Verrecchia, 1991;Bamber and Cheon, 1995l;Bamber et al., 1997;Gurgul et al., 2003). ...
Article
The study investigated the relationship between trading volume reaction around first dividends initiation. We use a sample of 546 public US firms that initiated first dividend between 2003 and 2012. Our results show that corporate governance has a significant association with trading volume reaction. These results suggest that that poor governance will increase the trading volume. In contrast, trading volume reaction does not relate to dividend payment, dividend yield and holding period return directly. Taken together our results suggest that poor governance induce investor heterogeneous belief around first dividend initiation. Our paper contributes to the growing literature on the cross sectional determinants of trading volume at the first dividend initiation.
... Several studies in accounting and finance discuss the stock market reactions and dividend announcement. Allen et al. (2000), Frankfurter and Lane (1992), Aharony and Swary (1980) Asquth and Mullins (1983), Dyl and Weigand (1998), Dhillon and Johnson (1994) (also measured its effect on the bonds prices), Lonie et al. (1996), Amihud and Murgia (1997), Dharmarathne (2013), Michaely et al. (1995) and many others. In contrast, only a few studies discuss the association between the trade volume and dividend initiation 8 and there is very little work explaining how investors are taking their positions in the financial market and how they are making their trading strategies (Bamber, 1987;Kim and Verrecchia, 1991;Bamber and Cheon, 1995l;Bamber et al., 1997;Gurgul et al., 2003). ...
... However, ours show that dividend decrease announcements have brought on positive price reactions, which is against the general signalling hypothesis. Other investigations using Indian data (Dharmarathne, 2013) and the UK data (Vieira & Raposo, 2007) documented the similar findings that dividend decreasing events carry positive and significant CARs. ...
Article
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This study attempts to investigate the stock price reaction to dividend announcements using data of Vietnamese listed firms on Hochiminh Stock Exchange (HOSE). Standard event study methodology has been employed on a sample of 198 cash dividend announcements made in 2011. The results show that stock prices react significantly and posi-tively to the announcements of cash dividends, including both divi-dend increasing and dividend decreasing events. It is also plausible that cumulative abnormal returns exhibit an increasing trend before announcement yet a decreasing trend after announcement dates. More specifically, we find positively significant cumulative abnormal re-turns of around 1.03% on announcement dates; other larger windows also demonstrate positive abnormal returns of around 1.3%. In addi-tion, cash dividends have different effects on share prices of firms from different industries. These results support the signaling hypoth-esis and are also consistent with prior findings of empirical research done on more developed markets, i.e. the US and the UK.
... Bandara (2001) an estimation period of 200 days used in his study for the estimate window. Dharmarathne (2013) used 120 days prior to the event for the estimate window. As there are no well-defined criteria for the estimate period this study uses 120 of past returns over the pre-identified estimation window to estimate the return generating models. ...
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This study analyzes the shareholders' responses at the announcement of the changes in executive directors of the companies listed on the CSE thereby provides a test of the semi-strong form efficient market hypothesis of Sri Lankan Share Market by using event study mythology. The sample consists of 66 listed companies, which made 156 of public announcements of the changes in the executive director on the CSE from 2009-2013. The Mean Adjusted Model, the Market Adjusted Model, and the Market Model along with proxy of the CSE All Share Price Index (ASPI) were used in this study in generating abnormal returns surrounding subsequent each announcement. Specifically, the Market model was used by incorporating cluster volatility effect and information asymmetric effects to get a strong conclusion. Apart from that Time Series models such as AR, MA, ARMA, GARCH, TARCH and EGARCH in relation to the stylized facts of each company returns within the sample specially to minimize the use of bias of the CSE All Share Price Index as a proxy in generating abnormal returns. Overall results of shareholders' responses to the changes in directors' announcements based on each model along with the proxy of CSE all-share price index show the negative reaction for information subsequent to the changes in directors' announcements in CSE. The abnormal returns appear on a prior to the actual announcement of the information, as well as after the actual announcement of the information. It confirms that the shareholders respond negatively before and after the actual announcement of the information. In addition, these results confirm that the Sri Lankan Share market is inconsistent with semi-strong form market efficient hypothesis. These findings will be important to all parties interested in the share market. Especially, it is more important to the investors, the managers of the companies and the stock exchange regulatory agencies in their decision-making process.
... Bandara (2001) an estimation period of 200 days used in his study for the estimate window. Dharmarathne (2013) used 120 days prior to the event for the estimate window. As there are no well-defined criteria for the estimate period this study uses 120 of past returns over the pre-identified estimation window to estimate the return generating models. ...
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This study presents new evidence on the relationship between dividend announcements and stock price responses, and provides a more comprehensive empirical analysis than that previously found in the literature. We simultaneously test several competing theories regarding the information content of dividends using two types of announcements: dividend initiations and specially designated dividends. The results of our analyses provide strong support for the single signal, cash-flow signalling hypothesis and only weak support for the John and Lang (1991) multiple signal, cash-flow signalling model. Supporting evidence is also presented for the predictions of the free-cash flow hypothesis.
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Research on this project was supported by a grant from the National Science Foundation. I am indebted to Arthur Laffer, Robert Aliber, Ray Ball, Michael Jensen, James Lorie, Merton Miller, Charles Nelson, Richard Roll, William Taylor, and Ross Watts for their helpful comments.
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The finance literature documents substantial positive stock price reaction to dividend initiations. Most dividend initiation studies focus on the average positive reaction; however, 40 percent of the firms that initiate dividends experience negative abnormal returns at announcement. This paper focuses on the apparent heterogeneity in the stock price reaction to dividend initiation. I find that the observed negative market reaction reflects the market’s economic assessment of the impact of the event on these firms, and that it is not caused by anticipation or confounding events. The result is also supported by the fact that the market reaction to dividend initiation for these firms is negatively related to initial dividend yield. Both the positive and negative observed reactions are consistent with conventional arguments regarding the information content of dividends, and their role in mitigating agency problems.
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An efficient signaling equilibrium with dividends and investment, or equivalently, dividends and either sales or repurchases of stock, is constructed and its properties are identified. Because corporate insiders can exploit two signals, the efficient mix minimizes dissipative costs. In equilibrium, many firms both distribute dividends and deviate from first-best investment. Also, the impact of dividends on stock prices is positive. By contrast, the announcement effect of new stock is negative for firms with private information primarily about assets in place and positive for firms with inside information mainly about opportunities to invest. Copyright 1987 by American Finance Association.
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Lecturer, Graduate School of Business Administration, Tel Aviv University, Israel, and Visiting Assistant Professor, North Carolina State University at Raleigh, and the Jerusalem School of Business Administration, The Hebrew University, and the Bank of Israel, Jerusalem, Israel, respectively. The authors thank Professor Yoram Peles of the Jerusalem School of Business Administration and an anonymous referee for helpful comments. Any remaining errors are, of course, ours. We also thank Dr. Dan Palmon of New York University for providing some data and Ms. Harriet McLaughlin of North Carolina State University for very extensive programming computations.
Stock prices Adjustment to the Information in Dividend
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Dividend signaling equilibrium: Quantitative evidence from the Brussels Stock Exchange. The finance Review
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Beer, F.M., (1993). Dividend signaling equilibrium: Quantitative evidence from the Brussels Stock Exchange. The finance Review. 28, 139-157.