Stock Price Reaction to Dividend Announcements

Abstract

Dividend declaration is considered as one of the key focus areas of the organisation’s financial policy. Majority of the companies consider it advantageous to declare the dividends, as it will have positive impact on its goodwill and the share prices. The dividend surprise conveys the same information as earnings surprise. Managers use the increase of dividends to signal about the firm. It means that firms announcing dividend initiations and increases should experience positive abnormal returns, while firms cutting and reducing dividend suffers negative abnormal returns. In this background, the present study is an attempt to study the stock price reaction to 65 dividend announcements (increase) by 28 companies during the period 2006-09 listed on BSE 30 Sensex. The analysis had been undertaken using Event study methodology. The study exposed the fact that that stock prices does react to increase in dividend announcements and dividend announcements do possess signaling property. The study also found out that Indian stock market is inefficient. Keywords: Dividend, Information Content, Signalling theory.

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