| SMART JOURNAL OF BUSINESS MANAGEMENT STUDIES |
VOL. 2 |
NO. 1 |
PAPER 6 |
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SIGNALING EFFECT OF DIVIDEND ANNOUNCEMENTS IN INDIA |
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| P. Thirumalvalavan * and K. Sunitha ** |
| * Professor, Bharathiar School of Management and Entrepreneur Development, Bharathiar University |
| ** Research Scholar, Bharathiar School of Management and Entrepreneur Development, Bharathiar University,India |
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| A cash dividend is cash payment to a corporation’s shareholders, distributed from current earnings or accumulated profits. An announcement of cash dividends would instantly seem to have some impact on a stock’s returns. To move a stock’s price, however, the amount of the dividend or the nature of the dividend must be a surprise. The dividend can be of almost any amount and shareholders have no guarantee of dividend payments. Decreasing or eliminating a dividend is tantamount to an announcement that the firm is financially distressed. Directors weigh dividend policies very carefully, rarely lowering dividends unless they have to, and not raising dividends unless they are confident that they can be sustained. Dividends are considered important because investors view them as a signal about a company’s future profitability. When a company announces a larger than expected dividend or unexpectedly announces a dividend cut, the market reaction is dramatic and sudden. This paper investigates and tests the following: 1) Signaling effect of dividend announcements 2) The market reaction to dividend announcements. Standard event-study procedures were used to calculate the abnormal returns. The analysis uses data of 21 firms in the BSE 500 index, which announced dividends during the period 2002 –2004. An examination of share price behaviour around dividend announcements proves the signaling effect of these announcements. Consistent with previous studies, the results show that dividend initiations have significantly positive effects on stock returns. Dividend announcements recorded high cumulative abnormal returns of 2.1 percent within one day of the event. Studies indicate that stock prices typically change to reflect dividend policy changes within the trading day of the announcement. With market reaction this quick, it is difficult, if not impossible, for investors to make extra money after the announcement has been made. The only way for an individual to take advantage of a positive or negative surprise dividend announcement is to be positioned prior to the announcement. |
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