Dividend Announcement And Market Response Indian Capital Market

Dividend policy is ever a challenge to any house ‘s funding determination. It ever plunges the house to make up one’s mind how much would be the dividend payout sing the proportion of maintained net incomes to be kept for future investing. A large inquiry is ever raised in many forums whether dividend is a inactive remainder, as it is non the active determination taken by houses instead an result of the investing proposals which houses project in future. There are many theories which unveil many dimensions sing the effectivity of dividend on portion monetary value counterpart on value of houses. So it leaves the justification upto the findings of empirical probe. Event survey seeks to mensurate the return consequence on securities due to happening of microeconomic or macroeconomic alterations. In the universe of finance event survey is widely applied to a assortment of firm-specific and economic events. Some events are bonus issue, stock splits, buy-back, amalgamation & A ; acquisition etc. Event survey is used to find a security ‘s monetary value reaction by comparing existent returns to estimated expected returns ( Fama, Fisher, Jensen and Roll, 1969 ) .

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Rationale behind the paper

On the background of this, it is required to analyze the consequence of the dividend proclamation on portion monetary value. Though a few researches have been conducted in this context but they are really thin and lack robust trials. Many a clip it is assumed that market is efficient, it reflects the full deduction of information through its monetary values. When any new event or new information appears in the market, it outright and unbiasedly seizes the information and elucidates in the current market monetary value. So, the event survey would explicate how investors behave upon reaching of new information and how it influences value of the houses. This information besides precedes the extent to which other information about long run net incomes of houses are already available or accessible to the market participants. If more information about the present and future net incomes is on the manus of public along with consistence of the information with existent public presentation, so dividend proclamation would be contained with less information. But in most of the instances directors are non able to to the full calculate and pass on the future net incomes of the house. Some factors besides play a critical restrictive function from accomplishing long tally normalized returns and market participants can non besides comprehend about those causes or factors. So, dividend proclamations come with a new clump of information bespeaking the house ‘s gaining power and liquidness ( Linter, 1956 ; Brittain, 1966 ; Friend & A ; Blume, 1970 ) . In position of this, this paper delivers the chances to the directors in inventing proper dividend policy to lure investors.

Objective and Scope of the paper

The aim of the paper IS to understand the impact of dividend proclamations on portion monetary values. Most of the surveies focus either merely on statistical theoretical account ( constant-mean-return theoretical account or Market Model ) or economic theoretical account [ Capital Asset Pricing Model ( CAPM ) or Arbitrage Pricing Theory ( APT ) ] . Our aim is to utilize both the theoretical accounts to analyze the consequence of such an event. It is ever seen that in most of the researches in India carried out merely parametric trials, a really few have been found with non-parametric trial ( Runs trial, Sign trial, rank trial etc. ) . So, our present survey besides employs the non-parametric trial as it is free of specific premises refering of the distributions of returns. The information of single stock return and market index return are used in our survey. S & A ; P CNX NIFTY is used as alternate of market portfolio.

The first subdivision trades with extant literature reappraisal of event survey and different issues associated with it. Second subdivision centres on the methodological analysis and the last subdivision illustrates the consequences and findings.

Extant Literature Review

Event surveies have a long history. Dolley ( 1933 ) foremost examined the monetary value effects of stock splits, analyzing the monetary value alterations at the clip of split. Using a sample of 95 splits from 1921 to 1931, he found that the monetary value increased in 57of the instances and the monetary value declined in merely 26 cases. There was no consequence in other 12 instances. Myers and Bakay ( 1956, 1957 & A ; 1958 ) and Ashley ( 1962 ) besides studied and explored the pertinence of event survey to a big extent. As the clip rolled on the edification in the survey has bit by bit been increased. Ball and Brown ( 1968 ) applied the construct of information content of net incomes and Fama, Fisher and Roll ( 1969 ) examined the effects of stock splits after taking the effects of coincident dividend additions. In ulterior period of clip Brown and Warner ( 1980 and 1985 ) presented documents which discussed the usage of monthly and day-to-day informations severally. In theory, the aim of a dividend policy is to maximize stockholder ‘s return so that the value of the investing is maximised. Walter ( 1963 ) argues that the pick of dividend policy about ever affect the value of the house. He clearly depicted the relationship between the house ‘s rate of return ( R ) and its cost of capital ( K ) in planing the dividend policy that will maximize the wealth of the stockholders. In instance of Growth house if house ‘s rate of return ( R ) is greater than its cost of capital ( K ) so value of per portion additions if the policy is to retain net incomes for internal investing. In instance of Normal houses where house ‘s rate of return ( R ) is equal to its cost f capital ( K ) dividend policy has no influence on the market value per portion. While in Worsening houses, where internal rate of return ( R ) is less than cost of capital ( K ) , robust dividend policy influences the market value per portion.

In the twelvemonth 1967, Myron Gordon had come up with a new dividend theoretical account. He developed his theoretical account based on the premises that all equity houses, no external funding, changeless return, changeless cost of capital, ageless earning, no revenue enhancements, changeless keeping and cost of capital. Unlike Walter ( 1963 ) , Gordon ( 1967 ) concluded that dividend policy does impact the value of a portion even when internal rate of return ( R ) is equal to cost of capital ( K ) . It is contingent upon the premise that under the state of affairss of uncertainness investors are more likely to dismiss distant dividends at a higher rate than they discount close dividends. Krishnan ( 1969 ) put frontward bird-in the manus statement which implies that of “ Of two stocks with indistinguishable earning record and chances but the one paying a larger dividend than the other, the former will doubtless command a higher monetary value simply because shareholders prefer present to future values. Myopic vision plays a portion in the price-making procedure. Stockholders frequently act upon the rule that bird in the manus is deserving. For this ground they are willing to pay a premium for stocks with higher dividend rate, merely as they discount the 1 with the lower rate ” ( I M Pandey, Financial Management, 1999, pp-744-767 ) .

But a different position has once more been hypothesized, popularly known as Modigliani and Miller ( M-M ) hypothesis ( 1961 ) . It iterates that under a perfect market state of affairs, the dividend policy of a house is irrelevant as it remains insensitive towards the value of the house. They commented that the value of house depends on the house ‘s net incomes which result from its investing policy. Therefore, when an investing determination is objectified the dividend determination produces no important impact on the value of the house. During the same period it was extremely contested by Solomon ( 1963 ) . He concluded that dividend proclamations ever come with new information. Dividend payment could break circulate the information about its expected net incomes growing. It conveys the feeling that the houses are gaining net incomes. Solomon ( 1963 ) dividend proclamation may offer touchable indicant that houses are able to engender hard currency. He states that,

“ … .in an unsure universe in which verbal statements can be ignored or misinterpreted. Dividend action does supply a distinct agencies of ‘making a statement ‘ that ‘speaks louder than 1000 words ” .

Linter ( 1974 ) bolstered the hypothesis with his empirical probe that dividend payments were, for big houses, are inflexible downwards. Firms by and large offer high rate of dividend when there is a possibility that hard currency flows in the hereafter would back up the dividend payment while dividend are reduced when the hard currency flows suffer from crunch. So, it decidedly conveys information about the hard currency flows of the company to the market.

Ross ( 1977 ) postulated Dividend Signalling Hypothesis which tells that dividend payments can signal the future net incomes of the house. It may alter the investors ‘ perceptual experiences about the peril of the house when it remains unchanged.

In India few literatures are found to light the impact of dividend proclamation on portion monetary values. Agarwal ( 1991 ) observed that current dividend is chiefly determined by the current net net incomes and past two old ages dividends in commercial vehicles sector. Three and four old ages lagged dividends are unable to explicate current degree of dividend. Chaturvedi ( 2000 ) obtained cumulative unnatural returns in post-announcement period of 21 yearss to 40 yearss, bespeaking stock monetary values do non allow quickly to the P/E ( Price/Earning ) information. Sponholtz ( 2005 ) discovered that response of stock market to the proclamation is attributed to information obscured in the current dividend and direction ‘s prognosis or anticipation of the following twelvemonth ‘s net incomes. Kaur and Singh ( 2005 ) produced same consequence of positive stock monetary value to the positive dividend proclamation. Chander, Sharma and Mehta ( 2007 ) explained that dividend income is insensitive to over-enthused investors in the lifting capital markets. They can gain unnatural return explicating an well planned investing schemes based on the cardinal analysis. Selvan et Al ( 2010 ) declared that dividend proclamations serve as a signalising mechanism of direction and statistically important unnatural returns around the proclamation day of the month. The market instantly follows an upward swing in the portion monetary value motions. But, the positive impact stays merely for a twenty-four hours, as the twenty-four hours passes on the positive consequence starts decreasing.

Any event or information is besides analysed to measure market efficiency. It is an built-in portion of any event survey which besides sheds visible radiation on efficiency issues. Efficiency is measured by the velocity of accommodation of any new information or invention that appears in the market. Pettit ( 1972 ) stated that,

“ aˆ¦a market that is inefficient would be characterized by houses with unnatural returns that tend to be over a period of clip after the proclamation ; connoting either that it takes considerable clip for the information to be disseminated across the market, or that there is a inclination to either consistently under-state or exaggerate the effects of such information on the monetary value of the security. Abnormal security public presentation prior to an proclamation may-but does non necessarily-imply that the market is inefficient. The market would be considered to be inefficient if this evident “ expectancy ” consequence was the consequence of purchases or gross revenues by investors who have entree to relevant information that has, for some ground, been withheld from the remainder of the market, or the alone ability of some investors to utilize publicly available information to foretell more accurately proclamations to be made. The market would non be considered to be inefficient, nevertheless, if the evident expectancy consequence was the consequence of old proclamations that are related to or correlated with the favourable or unfavourable intelligence conveyed by a dividend proclamation. ” ( Pettit R, 1972, The Journal of Finance, Vol-XXII, pp-993-995 )

In this regard, Patell and Wolfson ( 1984 ) observed intra-day accommodation of stock monetary values to net incomes and dividend proclamation. Ball and Brown ( 1968 ) found that after proclamation of net incomes, cumulative unnatural returns continue to travel up for good intelligence and travel down in the aftermath of bad intelligence. Many research workers viewed Indian capital market as semi-strong efficient one ( Manickraj, 2004 ) . But Mallikarjunppa and Iqbal ( 2003 ) Mallikarjunappa ( 2004 a, B ) and Iqbal ( 2005 ) do non set outright to quarterly net incomes which led to the fact that the Indian stock market is non semi-strong efficient. Again Iqbal and Mallikarjunappa ( 2010 ) found same consequence of inefficient semi-strong market.


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