Dividend Announcements, Stock Return Volatility and Abnormal Return Evidences
De Tours School of Management and Economics, Assumption University
Bangsaothong, Samuthprakarn 10570,Thailand
We test the relation between the dividend announcement date and the
market reaction to the dividend announcement by Thai listed firms.
We find the significant difference in positive
market reaction on the announcement date and 4 days after the announcement date
and negative market reaction on the 9 days before and 8 days after the
announcement date. The evidence
suggests that investors can gain the short-term return by day trade investing.
in the past shows that there are many measures that can assess the information
of cash dividend announcements. The two methods that most commonly use are the
unusual or abnormal
in stock return and the stock’s variability.
the stock price volatility does not have any theory that can significantly
support the hypotheses of the tests so the conclusions will be mainly based on
the literature (Acker, 1999)
returns which can be calculated by using events studies.
One of the
important factors in stock price changes is uncertainty of information which
reflect investor’s expectation of return and risk.
The paper has
utilized variability of returns as the measurement to find out the risk related
to volatility of the stock return, for both long term and short term, on and
around the date of announcement of dividends which included only cash dividend
by using methodology event study.
The ‘risk information
hypothesis’ proposes that cash dividend announcement
conducts a new change in risk of the firm. The decrease
in risk arise because the volatility of the firm and firm’s earnings
surprises have been reduced (Dyl
and Weigand, 1998).
The lower the volatility is, the lower
the opportunity of loss or gain in the short
the volatility of the equity returns is going to boost
up around the date of announcement of
the dividend in cash form only. The
volatility of equity returns is one of the essential measurement for measuring
the level of risk that the investors are exposed to (Guo, 2002), by nature investors are risk averse.
does not focus on the investigate of abnormal return related to
dividend announcement; alternately, it examines variability of returns
as the important aspect of risk.
study of the relationship between the announcement of cash dividend
announcement and the volatility of stock returns has been conducted by several
researchers. The arrival of new
information would affect the stock volatility which is the use to measure risk (Ross,1989).
the US, the studies related to dividend and stock price volatility were
conducted by many researchers but the result are mixed.
result of Baskin (1989)
that the relationship between dividend yield and stock price volatility is
inversely related but on the other hand Friend and Puckkett
John and Williams (1987)
came out positive. Based on signaling
theory, the dividend announcement may use as a tool to signal quality of the
firm to the public (Allen and Michaely,1995).
an unexpected change in dividend would influence the change in stock price in a
positive direction. Gordon
that shareholders prefer a certainty from cash dividend rather than an
uncertainty of capital gain that have more risk in future cash flow.
addition, frim believe that the announcement on dividend would make a positive
impact to value of the firm.
the other hand, the studies in different countries both developed and emerging
countries show the different results. In Australia, according
to Allen and Rachim (1996),
There is no supporting evidence that dividend yield would impact stock price
volatility. The same result occurs in
Bangladesh (Rashid and Rahman,2008).
and Gurgul (2003)
that the bad news announcement cause the price of stock more volatility sue to
the increase in uncertainty. The lower dividend
payment shows the greater business risk (Jensen
3. Objectives and research hypotheses
To identify the effects of
announcing the cash dividend decisions
on volatility of the equity returns, this
paper has also determined
the size and which direct that the risk will be changed
both short-run cash dividend announcement risk and
cash dividend announcement risk during the cash dividend announcement date in
The following is the null hypotheses:
H1: There is no significant difference in
risk before and after the cash dividends announcement date.
There is no significant difference in
risk before the cash dividends announcement date and after the cash dividends
There is no abnormal return during
period before and after the cash dividends announcement date.
H4: There is no cumulative abnormal return
during period before and after the cash dividends announcement date.
4. Research methodology
Data description and sample size
The study has presented five years
information during a period of 2012 to 2016.
The secondary data of cash dividend
announcements was collected from SET High Dividend 30 Index are in accordance
with those used for SET Index calculation. To derive the Index value, means of
market capitalization and weight with dividend yield were used to calculate.
The highest dividend yield used for the
calculation is capped at 15 percent.
There were 222 cash dividend
announcements of the 30 companies listed on SET High Dividend 30 Index as on June 30, 2011.
Out of the 30 companies listed, around
11 companies were Resources Industry, 8 companies were Financials Industry and
the remaining companies were in other industries like Property &
Construction, Technology, Services, Agro & Food and Industrial Industry.
However, there were cash dividend
announcement data that was not available for 3 companies, thus reducing the
sample size to 27 companies.
4.2 Event study methodology
4.2.1. Analysis of returns:
Event study methodology was employed to
examine the stock price reactions (Brown and Warner, 1985). The event
study can be used in both clinical studies which is used to investigate the effect
of an event of a single company’s stock prices and large sample studies which is used to
examine the effect of an event on prices of different sample stocks. Moreover,
researchers have also examined the impact of an event on stock volatility (DeFusco et
al., 1990; Engle and Ng 1993; Jayaraman and Shastri, 1993), on stock
trading volume (Benkraiem et al., 2009; Karafiath,
2009), or on accounting performance (Barber and Lyon,1996). Also, not
only company stocks can be examined in the event study but also other types of
securities. Daily and monthly returns are commonly found in many
literatures. Daily data is often considered as short-term event
studies (Lummer and McConnell, 1989; Small et al., 2007), whereas
monthly data is normally chosen for long-term studies (Ritter,
1991; Teoh et al., 1998b).
described the 5 main steps in
conducting an event study as follows:
v Identifying the event of interest and selecting
sample firm or stocks.
step requires to specify the date of this event.
The event date can be called as the
announcement date of the event (when
cash dividend is announced for the first time in the public newspapers), or day zero.
v Model the security price reaction or
identifying the time line of an event study.
step has to identify the test period (the event window)
and the estimation period (EP).
The event window of this study was 31
days during a period of 15 days prior to the announcement date to 15 days after
the announcement date along with the announcement day itself.
The estimation window was in a range of
day 16 to 166 days prior to the window) consisting of 150 trading days as shown
in Figure 1:
v Estimating the expected return for each
sample stock over a period.
expected return, (Ri,t)
is considered as the benchmark return
in the normal circumstance to compare with the actual return during the event
benchmark return represents the return unrelated to the event of interest which
can be calculated by using CAPM formula as can been seen from Equation 1 below:
The parameters like and are
estimated by running regression. Rm,t is the corresponding return on the
SET index and Ei,t is the error term. ?
v Computing abnormal or excess returns.
The abnormal return is the difference
between the actual return and the expected return on a particular day.
The abnormal return (AR)
for each day for each firm can be
obtained as following formula:
v Analyze the
results by testing the significance of abnormal returns
In order to
test the significance of abnormal returns, most event studies use a parametric
test of t- statistics (e.g. Brown and Warner, 1985; Barber and Lyon, 1997). For this
paper, we use one – sample t-test to calculate the abnormal return.
4.2.2. Clean event window period
To ensure that the event window study only
focused on pure cash dividend, thus, any other type of announcement like stock
dividends and stock splits, bonus issue and share repurchase mergers,
acquisitions, amalgamation, joint venture, capital investment, substantial
orders from prestigious customers or any other such financial events during the
event window were not considered as a part of the sample (McWilliams and
4.3 Analysis of short-term and long-term variance research designs
The experiment of
pre-testing and post testing research design is used to
measure the change in the volatility of returns.
The analysis is classified into two
periods in short-term
and two periods in long-term.
The short-run analysis
is evaluating based on a changing in variance over a period of 15 days for both
before date of cash dividend announcement and after date of cash dividend
the period regarded is before
event date of post announcement 120 days and 120 days after the ex-dividend date of the event date.
To test the differences are
significant or not, we use paired sample t-test to set against the mean of the before cash
dividend announcement and
after cash dividend announcement of the specified time period.
The fifteen days before and after the
ex-date are excludes
to avoid the distortions because of a lot of trading activity is made during those periods
Figure 2. the
periods of our investigating are
concerned both short run effects and long run effects of announcing a cash
purpose of this segment is to test whether is there a significant difference in
volatility of the sample companies before and after cash dividend’s announcement in both in short period and long period.
Moreover, this segment also tests the
excess return and cumulative excess return of the sample companies during the
period of announcement of cash dividend. The result will be shown in table 1, table 2 and table
5.1 Short-term effect
you can see from table 1, the variance has increased for 15-day periods after the cash dividend announcement.
The average risk of stock price after
the declaration is higher than the mean risk of stock price before the declaration,
but the result from the paired t-test show that they were not statically significant.
The increased variance come from the
significantly change in average abnormal returns after the announcement of cash
dividend as shown in table 3. Also, the
increased abnormal return may be from investors perceived the companies that
paying dividend as less risky and have enough free cash flow to repay
shareholders as dividend. Therefore,
companies that announce cash dividend gain popularity which lead to an upsurge
in trading volume. Also, they
will has higher volatility of return after the cash dividend’s announcement.
5.2 Long-term effect
Table 2 shows
that the return volatility from the long-term impact
of cash dividends of the samples companies.
The 120-day mean
variance had decreased. Also, the 120-day standard
deviation had decreased. The supporting reasons to this result are that
in the before-cash dividends, investors had weighted highly
on information of dividend announcement, or another way, they had disturbed the
price reaction that lead to high volatility in the before-cash
dividends. And the price changes in the after-cash
dividends period is less and its volatility is lower because the dividend
payment had occurred and there is no disturbance of the price from investors,
or we can say that the market condition is normal.
less volatility of the stock after-cash dividends period is that there is lower
trading volume of the stocks because the nature of the samples companies; high
dividend stock, is flat, mostly this kind of stock is not involved with
speculative investors, that create high price volatility.
Return and Cumulative Abnormal Return
The finding in this research
are obtained from the event study methodology using the average abnormal return
cumulative average abnormal return (CAAR) in dividend announcement date as the starting
point (day0) that were obtained from the sample stocks for
the study period. The sample period covers the 15 days before (day -15)
and after (day 15)
announcement date. To test hypothesis 3, the result in the table
show that the average abnormal return in the day of announcement (day 0)
and 4 days
after the announcement date (day +4) are 0.26%
and significant at 10% level with the positive t-statistic of
and 1.70 (p-value=0.09)
also shows that the AAR in the 9 days before (day -9)
and the 8
days after (day +8) of the announcement date are -0.28%
significant at 5% level with the negative t-statistic of -2.36 (p-value=0.02)
and -2.14 (p-value=0.03)
hypothesis 4, the result in the table show that there is no significant at any
level for cumulative average abnormal return (CAAR)
announcement date or the day before and after the announcement date.
respect to the test of the hypothesis 1, we not
reject the null hypothesis according to the p-value for two-tail is more
than significant level. However, the variance after the announcement of
cash dividend seem to be higher than before the announcement.
investors perceived companies paying cash dividends as less risky than company
that no dividend payment.
With the respect to the test of the
hypothesis 2, we do not reject the null hypothesis according to the p-value for two-tail is more than significant level.
However, the variance after the
announcement of cash dividend seem to be lower than before the announcement.
Therefore, investors perceived
companies paying cash dividends as more risker than company that no dividend
respect to the test of the hypothesis 3, we reject the null hypothesis
according to the significant on the day -9, day 0, day
4, and day 8. It is possible to make the profit by day
trading on the day of the announcement and the 4 days after the announcement
then gain the return of 0.26% and 0.19%
On the other
hands, it needs to rethink about buying the stock on the 9 days before and 8
days after the announcement date since the result show the negative return of -0.28%.
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