Nepalese Stock Market Efficiency in Respect of Cash and Stock Dividend Announcement
Keywords:
Efficient market hypothesis, Dividends announcement, Event methodology, Signalling effect, Abnormal returnsAbstract
This paper examines the abnormal returns of dividend announcements such as cash dividend, stock dividend, and both cash and stock dividend in the Nepalese stock market using the market model of event methodology after adjustment of existing thin-trading problem. To examine the abnormal returns of dividend announcements, 139 dividend announcement samples were partitioned into dividend-initiation (good-news), dividend-increase (good-news), dividend-decrease (bad-news), and no dividend-change (no-news) sub-samples. The positive excess returns on stock dividend announcement were found during the announcement day, indicating the Nepalese investors seek for stock dividend than cash dividend. The negative abnormal returns were found much higher on the cash dividend announcement day in the dividend-decrease case. As dividend signalling hypothesis and efficient market hypothesis, the no dividend-change announcements sub-sample shows that the entire 21-days event-window has insignificant abnormal returns. The dividend announcements have a signalling effect in the Nepalese stock market. The study also found that, to some extent, the Nepalese stock market supported the semi-strong form of market efficiency.
References
Aharony, J., & Swary, I. (1980). Quarterly dividend and earnings announcements and stockholders’ returns: An empirical analysis. The Journal of Finance, 35(1), 1-12.
Akbar, M., & Baig, H. H. (2010). Reaction of stock prices to dividend announcements and market efficiency in Pakistan. The Lahore Journal of Economics, 15(1), 103-125.
Al-Yahyaee, K. H., Pham, T. M., & Walter, T. S. (2011). The information content of cash dividend announcements in a unique environment. Journal of Banking & Finance, 35(3), 606-612.
Asquith, P., & Mullins, D. W. (1983). The impact of initiating dividend payments on shareholders’ wealth. Journal of Business, 56(1), 77-96.
Benartzi, S., Michaely, R., & Thaler, R. (1997). Do changes in dividends signal the future or the past? The Journal of Finance, 52(3), 1007-1034.
Bhatta, G. P. (2008). Stock market efficiency in Nepal. (Doctoral dissertation, Tribhuvan University, 2008)
Bhattacharya, S. (1979). Imperfect information, dividend policy and the bird in the hand fallacy. Bell Journal of Economics, 10(1), 259-270.
Bosch, J. C., & Hirschey, M. (1989). The valuation effects of corporate name changes. Financial Management, 18(4), 64-73.
Capstaff, J., Klaeboe, A., & Marshall, A. P. (2004). Share price reaction to dividend announcements: Empirical evidence on the signalling model from the Oslo Stock Exchange. Multinational Finance Journal, 8(1 & 2), 115-139.
Chen, D., Liu, H., & Huang, C. (2009). The announcement effect of cash dividend changes on share prices: An empirical analysis of China. The Chinese Economy, 42(1), 62-85.
Chen, G., Firth, M., & Gao, N. (2002). The information content of concurrently announced earnings, cash dividends, and stock dividends: An investigation of the Chinese stock market. Journal of International Financial Management and Accounting, 13(2), 101-124.
Cheng, L. T. W., & Leung, T. Y. (2006). Revisiting the corroboration effects of earnings and dividend announcements. Accounting and Finance, 46, 221-241.
Cochran, W. G. (1999). Sampling Techniques. Singapore: John Wiley & Sons.
Dangol, J. (2008). Unanticipated political events and stock returns: An event study. Economic Review, 20, 86-110.
Dangol, J. (2009). Abnormal returns of dividend announcements: Evidence from Nepalese stock market. Nepalese Economic Review, 1(2), 1-27.
Dasilas, A., & Leventis, S. (2011). Stock market reaction to dividend announcements: Evidence from the Greek stock market. International Review of Economics and Finance, 20(2), 302-311.
Dasilas, A., Lyroudi, K., & Ginoglou, D. (2009). The impact of dividend initiations on Greek listed firms’ wealth and volatility across information environments. Managerial Finance, 35(6), 531-543.
Dhillon, U. S., & Johnson, H. (1994). The effect of dividend changes on stock and bond prices. The Journal of Finance, 49(1), 281-289.
Elfakhani, S. (1998). The expected favourableness of dividend signals, the direction of dividend change and the signalling roll of dividend announcements. Applied Financial Economics, 8, 221-230.
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417.
Fama, E. F. (1991). Efficient capital markets: II. The Journal of Finance, 46(5), 1575-1617.
Gurgul, H., Majdosz, P., & Mestel, R. (2006). Implications of dividend announcements for stock prices and trading volume of DAX Companies. Czech Journal of Economics and Finance, 56, 58-68.
Healy, P. M., & Palepu, K. G. (1988). Earnings information conveyed by dividend initiations and omissions. Journal of Financial Economics, 21(2), 149-176.
Hovav, A., and D’Arcy, J. (2003). The impact of denial-of-service attack announcements on the market value of firm. Risk Management and Insurance Review, 6(2), 97-121.
Jensen, M. (1986). Agency costs of free cash flow, corporate finance, and takeover. American Economic Review, 76(2), 323-329.
John, K., & Williams, J. (1985). Dividend, dilution and taxes: A signalling equilibrium. The Journal of Finance, 40(4), 1053-1070.
Joshipura, M. (2009). Price and liquidity effects of bonus announcements: Empirical evidence from Indian stock market. The IUP Journal of Applied Finance, 15(11), 5-23.
Mallikarjunappa, T., & Manjunatha, T. (2009). Stock price reaction to dividend announcements. Journal of Management & Public Policy, 1(1), 43-56.
McCluskey, T., Burton, B. M., Power, D. M., & Sinclair, C.D. (2006). Evidence on the Irish stock market’s reaction to dividend announcements. Applied Financial Economics, 16, 617-628.
McWilliams, A., & Siegel, D. (1997). Event studies in management research: Theoretical and empirical issues. Academy of Management Journal, 40(3), 626-657.
Michaely, R., Thaler, R. H., & Womack, K. L. (1995). Price reactions to dividend initiations and omissions: Overreaction or drift? The Journal of Finance, 50(2), 573-608.
Miller, M., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. The Journal of Business, 34(4), 411-433.
Miller, M. H., Muthuswamy, J., & Whaley, R. E. (1994). Mean reversion of Standard & Poor’s 500 index basis changes: Arbitrage-induced or statistical illusion? The Journal of Finance, 49(2), 479-513.
Miller, M. H., & Rock, K. (1985). Dividend policy under asymmetric information. The Journal of Finance, 40(4), 1031-1051.
Mollah, S. (2007). Price reaction to dividend initiations and omissions in emerging market: Evidence from pre and post market crisis in Bangladesh. The International Journal of Business and Finance Research, 1(2), 51-68.
Pettit, R. R. (1972). Dividend announcements, security performance, and capital market efficiency. The Journal of Finance, 27(5), 993-1007.
Pettit, R. R. (1976). The impact of dividend and earnings announcements: reconciliation. The Journal of Business, 49(1), 86-96.
Raja, M., & Sudhahar, J. C. (2010). An empirical test of Indian stock market efficiency in respect of bonus announcement. Asia Pacific Journal of Finance and Banking Research, 4(4), 1-14.
Strong, N. (1992). Modelling abnormal returns: A review article. Journal Business Finance & Accounting, 19(4), 533-553.
Uddin, M. H., & Osman, D. (2008). Effect of dividend announcement on shareholders’ value: Evidence from Saudi Arabian Stock Exchange. The International Journal of Business and Finance Research, 2(1), 87-101.
Van Eaton, R. D. (1999). Stock price adjustment to the information in dividend changes. Review of Quantitative Finance and Accounting, 12, 113-133.
