Determinants of Cumulative Abnormal Return: A Dynamic Approach

Abstract

There is a large body of finance literature that has tested and validated dividend policy decisions mainly focused on the effect of the dividend announcement and the impact it has on the post announcement drift. But very few studies have tested the determinants of the cumulative abnormal return (CAR) surrounding the dividend announcement and to find the role of economic adversity in explaining the change in CAR. The present study investigates the role of change in dividend under both adverse and favorable market conditions. Using the data of S&P CNX 500 companies the study examines the role of dividend yield and EPS in explaining cumulative abnormal return over a period of seven years. Using VAR methodology the study examined the determinants of CAR surrounding the dividend announcement and the dynamic relationship between the variables. The results of the study showed that during adversity, dividend yield is the major factor explaining CAR. Variables like EPS, volume and price explain the CAR when there is no economic adversity. The study found that there is a significant relationship between abnormal return and its determinants.

Keywords: Dividend Policy, Signaling Hypothesis, Economic Adversity, CAR

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