Dividend announcement effect on Indian bourses

Dividend announcement effect on Indian boursesmarket place.
Perhaps no other area of finance has been subjectThe sample and data
to so much empirical investigation during the last fourThe present study covers a period of more than
decades as the behavior of stock prices. The presentthree years from April 2005 to March 2008 and the
study attempts to contribute positively to theresults are based on a sample of 100 stocks, listed in
understanding of the behavior of Indian share pricesthe National Stock Exchange. Two basic time series
in relation to the dividend announcements. The studydata have been employed in this study. These are
analyze the dividend announcement, it includes 100the daily closing price of all the stocks and dividend
blue chip companies. The dividend is the cost ofper share for each year and for the each share are
equity capital to equity shareholders. Theused. The data is collected from the daily
announcement has an impact on the market price ofnewspapers like business line and the economic times.
the shares; the market will react positively, if theMethodology
dividend is upto the expectation level of the equityThe event study methodology and time series
investors. At the same time if the dividendanalysis have been adopted to analyze the mass
announcement is not the expectation level of thedata. The supporting statistical tools can be used for
shareholders, the market reaction will in bear trendsimplification and application of the data analysis. The
for that particular scrip.abnormal returns are calculated for the entire period.
The present study covers the aspects are: theEmpirical results
theories concerning share price behavior, namely theThe abnormal returns implicit in the trading strategy
fundamental analysis and technical analysis; theoccur during the prior and post announcement
concepts of market efficiency and its historicalperiods. Empirical results for the study period as a
development; review of studies on market efficiencywhole also reveal that roughly three-fourth of the
with a separate discussion of evidence relating to thetotal price response occurred in the post
Indian capital market and a brief account of variousannouncement period. The price response is not only
dimensions of stock market in India which aredelayed, it persists in the control period +10 to 15
expected to have a bearing on market efficiency.days. Roughly one-fourth of the total price
Objectives of the studyadjustment occurs in the control period +10 days to
The objectives of the study has been15 days. That is, during the study period, investors
To examine the behavior of stock prices around thecould have earned abnormal returns by following the
announcement of dividends of the companystrategy if their investment action was delayed to
To investigate if strategies based on informationthe extent of 10 days which amounts at least to one
contained in dividend announcement could be used tocalendar month.
outperform the market.An analysis of the difference in cumulative abnormal
To find the correct path of future trends based onreturns between the highest and lowest portfolios
the announcement effect.are with the identical risk reveal the former
In this context, the behavior of stock prices hasconsistently outperformed the later except for the
been examined in the prior and post announcementyear 2007. The differences in cumulative abnormal
periods in relations to the unexpected earningsreturns between the lowest and the highest
defined in two ways i.e., sign of unexpectedportfolios with risks are equal to one are positive for
dividends and the standardized unexpected dividendsthe event window for the all years.
and the price-earnings ratios.Conclusion
Hypothesis of the studyAn important finding of the study is that unusually
The hypotheses which have been tested are;high abnormal returns in the pre-announcement period
That the reaction of stock prices to the sign of theare succeeded by either negative abnormal returns or
unexpected dividend announce is completer on theconsiderably reduced abnormal returns in the
day of the announcement.post-announcement period. The beta (risk) values for
That there is no difference in stock price responseindividual stocks and portfolios are found to vary
to portfolios based on price-earnings ratios.considerably in the adjacent periods. The historical
That there is no difference in the stock pricerisks are poor indicators of future sensitivity of
adjustment to the different; and categories of stocks to the movement of the market movements.
portfolios based on unexpected dividends.The abnormal returns were found to persist upto 15
A gradual adjustment of stock prices to the dividenddays subsequent to the announcements.
announcements is considered imperfect in the share