Cash dividend announcement effect evidence from dhaka stock exchange

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    • 1. Research Journal of Finance and Accounting www.iiste.orgISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 2, 2012Cash Dividend Announcement Effect: Evidence from Dhaka Stock Exchange Md. Shehub Bin Hasan1* Sabrina Akhter2 Hussain Ahmed Enamul Huda2 1. School of Business, Ahsanullah University of Science & Technology, 141-142 Love Road, Tejgaon Industrial Area, Tejgaon, Dhaka-1208, Bangladesh 2. Faculty of Business & Economics, Daffodil International University, 4/2, Sobhanbagh, Prince Plaza, Mirpur Road, Dhaka-1207, Bangladesh * E-mail of the corresponding author: shehub_mir@yahoo.comAbstractThe sole motive of the paper is to investigate cash dividend announcement effect of the stocks traded inthe Dhaka Stock Exchange from 2006 to 2010. Classic event study methodology was used to analyzethe data. It was found that in 2006, 2007 and 2009 market has reacted over the announcement in theevent date. Some sectors like Food & Auxiliary, Fuel and Miscellaneous have impacted the marketboth in the event and post event date across the years considered. All the efforts were given to discoverreaction therefore the underlying reasoning of such impact are set aside.Keywords: Cash dividend, Dhaka stock exchange, Event study, Announcement effect1. IntroductionSecurities, to be more specific stocks are not traded in a vacuum, rather amidst the complex interactionof many variables – some explainable and some not manageable. Thousands, perhaps even morevariables can exert influence over stock price and dividend isthe prime variable. Irrespective of thestock market location – New York, Tokyo, Mumbai or Dhaka, stock price volatility at the dividendannouncement date and post announcement dates is a common phenomenon, even though the extent ofvolatility does differ across globe. This study explores the price behavior and evidence of abnormalreturn at cash dividend announcement date and post announcement date of various stocks traded inDhaka Stock Exchange (DSE). This study only considers cash dividend paying firms during 2006 to2010.Normally, two generic effects can be associated with cash dividend declaration – a wealth transfereffect and a signaling effect (Woolridge; 1983). In the absence of a perfect me-first principle, afinancing decision like cash dividend payoff will certainly result in wealth transfer among variousclusters of security holders. Long ago, Modigliani and Miller (1958, 1961) had postulated that giveninformation symmetry, perfect capital market and production-investment decision preset, the value of afirm reflected in stock price is totally independent of any sort of financing decision like cash dividendpayoff. Fama and Miller (1972) had added that in the presence of a perfect me-first rule, any type offinancing decision like cash dividend payoff could not have any influence over stock price as well asstockholder’s and bondholder’s wealth. But reality is totally different from Modigliani’s, Fama’s andMiller’s illusionary Atlantis and in reality protective covenants are often incomplete and limited,resulting in wealth transfers in case of cash dividend payment. In a world of information asymmetry,managers convey their messages and expectations to the market by using financial signaling.Bhattacharya (1979), Kalay (1980) had developed cash dividend signaling model assuming that thereexisted information asymmetry between security holders and managers. As per each of the abovementioned dividend signaling model, stock prices move to a new equilibrium level in responses to theinformation that the managers tries to convey in dividend decision. Generally with positive unexpecteddividend change, there will be positive signaling and wealth transfer effect from common stockholder’sperspective (Woolridge; 1983). On the other hand, with negative unexpected dividend change, therewill be negative signaling and wealth transfer effect from common stockholder’s perspective(Woolridge; 1983). The impact of cash dividend announcement on stock price has certainly grabbed 12
    • 2. Research Journal of Finance and Accounting www.iiste.orgISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 2, 2012huge academic attention. Aharony and Swary (1980), Eades (1982), Kwan (1981) and Woolridge(1983) had found significantly positive relationship between dividend change and announcement datestock return. These results had been attributed to wealth transfer hypothesis and information contentcarried by the financing decision. Dann (1981) had found evidence of statistically significant positivereturn for stocks on the announcement date and for non-convertible bond and debt the return was non-significant. Vermaelen (1981) had also found similar results in case of stocks but he did not test thecash dividend announcement effect for preferred stock and bonds.Empirical research had shown that the market generally reacts positively to the announcement of cashdividend. Numerous studies in Bangladesh have dealt with the information content of various types ofannouncements especially announcement regarding cash dividends. This research paper is certainlygoing to enhance the quality of the existing literatures. The study has been performed using a verysimple methodology provided by Mark P. Kritzman (1994) for the detection of any marketreaction was the sole objective. No effort had been exerted to diagnose the underlying reasonbehind market reaction. The study has been conducted using only a parametric test whereasthere were numerous parametric as well as non-parametric tests to conduct such a study. TheCumulative Average Abnormal Return (CAAR) was avoided as market efficiencyidentification was not the objective of the study. The data used in the study were collectedfrom the Dhaka Stock Exchange library and from Bangladesh Bank. The daily trade data forthe companies upon which the study was conducted sometimes was found to be disorderedand missing. In some instances, bootstrapping or linear interpolationwas used to reduce suchanomalies but these manufactured data could have hampered the conclusion.2. Literature ReviewThe principal goal of finance manager is to maximize the investment value of the stockholders. Formaximizing the stockholder’s value financial managers take different investment and financingdecision. Apart from taking investment and financing decision, stockholders have to take dividendbasically cash dividend decision – whether to pay off part of the current earnings to the stockholders asreward and with an implied intension to reduce agency problem (Jensen and Meckling, 1976).Empirical findings revolving market reaction after cash dividend announcement had been mixed.Academicians like Gordon (1959), Ogden (1994), Stevens and Jose (1989), Kato and Loewenstein(1995), Ariff and Finn (1986), and Lee (1995) had found statistically significant above average stockmarket return after cash dividend announcement. On the other hand, Easton and Sinclair (1989) hadfound statistically significant negative stock market return after cash dividend announcement. Thenegative relationship between stock market return and cash dividend announcement is attributed toincome tax effect and the positive relationship between stock market return and cash dividendannouncement is attributed to information effect of dividend.In a well-functioning stock market, on an average, dividend declaration should not create any surpriseor panic (Bajaj and Vijh, 1995). In the absence of any market microstructures and in the presence ofmarket efficiency, if all the abnormal returns revolving cash dividend announcement are taken togetherthe sum should be a big zero. But Kalay and Loewenstein (1985) had found evidence that the dailystock returns surrounding announcement dates (three day) were statistically significant from the returnpredicted by market model and from the recent realized average daily return. Kalay and Loewenstein(1985) had also found evidence that market reaction to cash dividend announcement date was a bitsluggish since the excess return persisted over four days after the announcement date. According toKalay and Loewenstein (1985) the unconditional positive excess return during the announcement datewas significantly higher for small firm and low-priced stock than the case with large firm and high-priced stocks. Using almost the similar kind of methodology, Eades, Hess and Kim (1985) had foundevidence that the average daily return around cash dividend declaration date was abnormal, eventhough the researchers did not find any confirm evidence of sluggish market reaction. Eades, Hess andKim (1985) had also confirmed that market reaction to cash dividend announcement was biased. Verymuch like the previous studies conducted by Asquith and Mullins (1983) and Healy and Krishna(1988), Michaely, Thaler and Womack (1995) had found cash dividend omissions were associated witha mean drop of 7% on the announcement date and cash dividend initiations were with a mean increaseof 3% on the announcement date. Bajaj and Vijh (1995) had found that average excess return to cash 13
    • 3. Research Journal of Finance and Accounting www.iiste.orgISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 2, 2012dividend declaration increased as firm size and stock price decreased. Based on the research conductedon a mammoth scale (67,592 cash dividend declaration cases of NYSE stocks across 25 years), theresearcher had found evidence of 0.21 percent average excess return over the three-day cash dividendannouncement period. For the lowest decile of firm size (stock price), the average excess return was0.67 (0.61) percent, while the corresponding average for the highest decile of firm size (stock price)was 0.07 (0.05) percent.Such firm-size and stock price effect was attributed to spillover of tax-relatedtrading around ex-dividend days andtrading behavior related to the dissemination ofdividendinformation. Karpoff and Walkling (1988) explained that tax-arbitrage trading around ex-dividend daysshould eliminate excess returns within the limits of transaction costs. The researcher had foundevidence that excess returns were higher for small-firm and low-priced stocks (for which transactioncosts were greater) and also suggested that the marginal investors around ex-dividend dates were short-term traders. According to Kim and Verrocchio (1991), the anticipation of public information regardingcash dividend stimulated investor’s tendency to collect costly private information. Traders andinvestors generally collect these costly public information regarding cash dividend in order to get thecompetitive advantage at the time of interpreting subsequent public information. Kim and Verrocchio(1991) had predicted statistically significant price volatility and trading volume during the cashdividend announcement period because upon the release of the public information, both traders andinvestors would revise their prior beliefs. The aforementioned researchers had also predicted thatexpected increases in trading volume and price volatility were function of precision needed on apositive tone and function of the volume of preannouncement public and private information on anegative tone. On the other hand, Grundy and McNichols (1989) had attributed portfolio rebalancingreasons to the statistically significant price volatility and trading volume during the cash dividendannouncement period. Uddin (2003) had examined the dividend effect on shareholders’ value in DhakaStock Market with a sample of 137 companies which announced dividend over a period from October2001 to September 2002. The researcher’s results showed that Cumulative Abnormal Return (CAR) of137 stocks portfolio increased shortly before the announcement of dividends but this value increase didnot sustain in the ex-dividend periods. Indeed, the shareholders’ of dividend paying companies lostsignificant amount of value over a period of 30 days after the dividend announcement. However, thelost value can be partially compensated by the dividend yield.Much theoretical aspects have been already described about the immediate market reaction regardingcash dividend announcement. Now it is the time to discuss the long-term post announcement effect ofcash dividend payoff and omission. Even though, each market gets an initial chance to react with thechange in cash dividend policy there had been a world-wide evidence of subsequent above averagereturns. There are basically three schools of thought explaining this financial paradox. Ball and Brown(1968), Foster, Olsen and Shevlin (1984), and Bernard and Thomas (1989) had found evidence of‘post-earnings-announcement drift’. ‘Post-earnings-announcement drift’ is an example of marketunder-reaction where the initial price movement is inadequate leaving the room for further drift.According to the aforementioned researcher cash dividend omission and initiation resembles earningsannouncement surprises, so similar drift in price is expected. As per this study goes, prices of firms thatomit a dividend would drift down, after the immediate reaction to the omission, and prices of firms thatinitiate would drift up. Academicians like De Bondt and Thaler (1985), Bremer and Sweeny (1991) hadexplained the long-term post announcement effect of cash dividend payoff and omission using acompletely different paradigm – market overreaction or mean reversion in prices. Bremer and Sweeny(1991) studied the entire set of one day price changes of greater than 10 percent for a sample of largeNYSE companies. They had found that over the next six days, the prices of the losers rebounded byabout 30 percent of the original loss. There was no evidence of rebound for the winners. De Bondt andThaler (1985) characterized those results as evidence of overreaction to the accumulation of bad newsduring the formation period. One might expect a similar reaction to the omission of a dividendespeciallysincefirms that take this action are likely to be long-term losers. The overreactionliteraturealso suggests that the price patterns might be different for omissions and initiations, with arebound only for the omissions. Black and Scholes (1974) and Shefrin and Statman (1984) hadexplained the long-term post announcement effect of cash dividend payoff and omission using‘clientele effect’ theory. The reason why one might expect excess returns following a dividendinitiation or omission is the likelihood that such actions could cause a change in the type ofstockholders owning the company. This is known as a clientele effect. Changes in a firms stockholderclientele may occur because some individual stockholders dislike cash dividends for tax reasons, while 14
    • 4. Research Journal of Finance and Accounting www.iiste.orgISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 2, 2012others may prefer the cash payments. Similarly, some institutions may either have a preference fordividends or be required by charter to own stock only in dividend paying companies.3. MethodologyIn this paper event study methodology is used to assess the impact of cash dividend announcements onthe prices of the underlying stocks. This involves extracting, for all companies and years, strips ofabnormal return data for some window around the event dates of interest, and pooling the resultingtime-series and or cross-section data to identify patterns which repeatedly occur before, at, or after theevent date. Implicitly, it is assumed that the cash dividend payments are the only significant factorsaffecting all prices in the days around the events.Event studies start with hypothesis about how a particular event affects the value of a firm. Thehypothesis that the value of the company has changed will be translated in the stock showing anabnormal return. Coupled with the notion that the information is readily impounded in to prices, theconcept of abnormal returns (or performance) is the central key of event study methods.Event studies measure the relationship between an event that affect securities and the return of thesesecurities. Some events, such as a regulatory change or an economic shock affect many securities; otherevents such as earnings announcement are specific to individual securities.The most common approach to conduct event studies involves the following steps: • Defining the event and identifying the timing of the event. In this study only those firms are considered which announces only cash dividend. This announcement is the event and the dividend declaration date is the event date. The analysis is done in from 2006 to 2010. • Arranging the security performance data relative to timing of the event. If the information about the event is released fully on a specific day with time remaining for traders to react, the day of the announcement period is zero. Here 90 days of estimation window, event date and immediately after the announcement the next trading day is considered as the post event date. The study does not include more days in the postevent period because those days may have some other informational content. The pre-event trading days would be labeled as t- 90, t- 89, t- 88…, t- 1; the event day, t = 0; and the post event trading days, t+ 1. Because the event is specific to each security, these days will differ across securities in calendar time based on the announcement date. • Separating security specific component of the return from the security’s total return during the pre-event measurement period. In event study methodology, the interest is to measure the performance of a security following an “event”. An important step in this process is to define what a “normal” or expected performance is or should be, and then it will be a matter of computation to realize what can be considered as “abnormal” performance. The Abnormal return represents the difference between the “expected” return and the actual return. Several methods are used in prior research to estimate expected or normal return; Mean Adjusted Model, Market Adjusted Model, Market Model, the Capital Assets Pricing Model (CAPM) and more recently Fama-French Three Factor Model. The essence of all these models is to subtract the actual performance from the expected performance. In other words, abnormal returns are the differences between event returns and non-event returns (expected returns unconditional on the event). What differ among these models are the assumptions about the expected return E(Rit) and the risk for the security with regards to the market portfolio reflected in the coefficients. In practice, the gains from using more sophisticated models are limited because the variance of abnormal return is not reduced significantly by choosing these models (Brown and Warner, 1985; and McKinley, 1997).Here market adjusted model is used to estimate abnormal returns, where it assumes the expected returns are equal across all stocks at a point of time t, but not necessarily constant for a stock at different times. The approach followed in this paper is the market model. The market model isolates the security specific return using Ordinary Least Square (OLS) method. First, the security’s daily returns during the pre-event measurement period from t- 90 through t- 1 are regressed on the 15
    • 5. Research Journal of Finance and Accounting www.iiste.orgISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 2, 2012 market’s return during the same period. The security specific returns are defined as the differences between the security’s daily returns predicted from the regression equation (the security’s alpha (intercept) plus its beta (slope) times the market’s daily returns). These security specific returns will be called as ‘Abnormal Return’ (AR). This calculation is described by the following equation: , = , − − , Where , = security- specific return of security i in period t or the Abnormal Return. , = total return of security i in period t = alpha or intercept of security i estimated from pre-event measurement period using Ordinary Least Square method. = beta or slope of security i estimated from pre event measurement period. , = total return of market in period t. • Estimating the standard deviation of the daily security- specific returns during the pre-event measurement periods from t- 90 through t- 1. This calculation is described by the following equation: ∑ , − = , , −1 Where , = standard deviation of security specific returns of security i estimated from pre-event measurement period , = average of security specific returns of security i estimated from pre-event measurement period = number of days in pre-event measurement period • Isolating the security specific return during the event and post event periods. In order to estimate the security specific return each day during these periods, subtract from each security’s total return each day the security’s alpha (intercept) and beta (slope) times the markets return on that day. The alphas and betas are the same as those estimated from the pre- event regressions. The equation for estimating these returns is the same as described in step three. The subscript t, however, ranges from 0 to +1 rather than from -90 to -1. • Aggregating the security specific returns and the standard deviations across the sample of securities on the event day and the post event days; that is, summing the security specific returns for each day and divide by the number of securities in the sample as shown in the ∑ following equation. = , Where = Number of securities in the sample = Average across all securities of security specific returns in period t The standard deviations are aggregated by squaring the standard deviation of each security’s specific return estimated during the pre-event period, summing these values across all securities, taking the square root of this sum, and then dividing by the number of securities. The calculation is shown below: ∑ = , , Where , = Aggregate of pre-event standard deviations of security- specific returns across all securities Testing the hypothesis that the security specific returns on the event day and post event days differ significantly from zero. All tests of statistical significance are tests of the null 16
    • 6. Research Journal of Finance and Accounting www.iiste.orgISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 2, 2012 hypothesis that abnormal returns are zero over any event window. However, rejecting this null hypothesis indicates the possibility of achieving predictable abnormal returns and outperforming the market. The t- statistic is computed by dividing the average of the security specific returns across all securities each day by the aggregation of the standard deviations across all securities as described in the previous step. Then, depending on the degrees of freedom, determine whether the event significantly affects returns. That is, − ! " "# = ,We can form our hypothesis as follows:H0: The abnormal returns on the event day and post event day is zero or$t = %H1: The abnormal returns on the event day and post event day differ significantly from zero or$t ≠ %If the event is unanticipated and the t- statistic is significant on the day of the event but insignificant onthe day following the event, a reasonable conclusion is that the event does affect security returns butthat it does not contradict the efficient market hypothesis. If, by contrast, the t- statistics continue to besignificant on the post event day, it might be concluded that the market is inefficient. But merely usingsuch a simple methodology that has been used in this study it would be that much courageous to draw aconclusion of this magnitude. Instead of drawing this conclusion the primary focus of the study is toshed light on whether market has reacted over the study period because of cash dividendannouncement. In the latter part data analysis and results of the analysis is presented.All the data are secondary in nature and collected from Dhaka Stock Exchange Library personally bythe authors and Treasury bill rates are collected from the Bangladesh Bank website( Results and DiscussionsThe study considered an event window of 92 days consisting of t - 90 to t + 1 relative to event day t =0. Event date is the date of announcement of cash dividend. The aim of the study being exploring thereaction of the stocks listed in the DSE, it is tried to explore, whether the Abnormal Returns areindicating any pattern or not.Before moving on to the core analysis some observations on the dividend announcement isindispensable. Among the 324 companies that were on the trading chart of DSE, 115 in 2006, 109 in2007 and 114 in 2008 have declared a dividend was always representing more than 50% of the listedcompanies. On the contrary both in 2009 and 2010 it was less than 50% of the companies that giveaway cash dividend. Table- 01 also shows that 29, 32, 25, 36 and 24 companies declared both cash andstock dividends respectively from 2006 to 2010. Most the firms announced cash dividends but the trendis not an increasing one.Banks and Non-Bank Financial Institutions (NBFI) are less interested in issuing cash dividend.Miscellaneous, Pharmaceuticals & Chemicals and Textile sector favored cash dividend but the numberis reducing as reflected in Table- 02. Only the Investment sector has experienced a rise in the numberof cash dividend paying companies. Apart from that every sector tasted a reduction.Therefore for the sake of this study it is very much crucial that sufficient focus is given on the trend ofdividend declaration. Figure- 01 depicts that the number of companies announcing dividends isdecreasing year by year. And what are the hidden reasons of such a behavior on the part of the managerwhether the clientele really in need of money or the companies are signaling the market that companiesare capable of providing extra money to investors which eventually have some implications on thestock price is the main observing point.In this particular study emphasis is only given to cash dividend announcement to observe whether inthe event and post event day abnormal returns shows any sort of behavior or not. In this regard thetrend of stock dividend announcement carries much weight because apart from some accountingtreatment the announcements should not have any effect. Despite that companies are continuouslyannouncing dividends even though the number is falling as revealed in Figure - 01. Therefore what isthe motivating factor behind such a behavior is the issue that provides impetus for this study. 17
    • 7. Research Journal of Finance and Accounting www.iiste.orgISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 2, 2012Now it is time to explore some descriptive characteristics of the DSE General Index (DGEN) whichwas used to represent the market. The Table- 03 is providing some facts regarding the DGEN.According to the trading days the N statistic varied from year to year. In 2008 DGEN has the highestaverage return of about 0.281% and the lowest was – 0.059% in 2006. On the other hand the highestand lowest standard deviation was 1.817% and 1.089% respectively in 2010 and 2007.After looking at all the relevant information the main part of the analysis will start from here.4.1 Announcement Effect AnalysisIn analyzing the announcement effect of cash dividend statistical significance is tested year by year.The analysis will cover: Companies announcing only cash dividend; Overall market reaction analysis both in the event date and post event date and Sector-wise market reaction analysis.4.1.2 Analysis of Year 2006Analysis of event date revealed that in 2006(Table- 04) the t-statistic was -15.15227617and withrespect to 1% and 5%significance level and the null hypothesis got rejected.There is statisticallysignificant market reaction at the event date in 2006 implying an abnormal return of -43.0%. At thepost event date with a t-statistic of 0.04775322and with similar level of significances the nullhypothesis is accepted, referring no statistically significant reaction.The companies that announced cashdividends were then divided based on their respectivesectors(Table- 05).On the event date as well as post event date analysis revealed that the nullhypothesis is accepted across all the significance level implying no statistically significant marketreaction for Bank and Insurance. For Investment, Cement & Ceramic and Engineering at event datenull hypothesis was accepted and on the post event data it was rejected with abnormal returns of -8.2%,29.35% and 44.94%. On the contrary in case of NBFI, Food and Auxiliary,Fuel, Miscellaneous,Pharmaceuticals & Chemicals and Textile sectors null hypothesis got rejected on the eventdatethroughout all significance levels with abnormal returns of -43.10%, -122%, -15.16%, -93.74%,144.85% and -49.89% respectively. But on the post event date except for Food and Auxiliary at 5%significance level with 15.81% abnormal return others got accepted.4.1.3 Analysis of Year 20072007 divulges that at the event date and post event date t-statistic was -6.528068288 and -1.4785196(Table- 06) respectively.Most importantly at all the significance levels the null hypothesisgot rejected with abnormal returns of -54.8% in the event date and accepted in the post event dateindicating no statistically significant market reaction.The analysis of different sectors(Table- 07)found that at all the significance levels and across eventsNBFI, Cement & Ceramic, Food & Auxiliary and Fuel do not reflect any statistical significance in theannouncement effect. For Bank, Pharmaceuticals & Chemicals and Textile event date shows thepresence of abnormal return with -269%, -108% and -1.06%. In case of Insurance, investment (only at5% significance level), Engineering and Miscellaneous reflect abnormal return in the post event datewith 63.86%, -41.68%, -70.79% and -42.86% respectively.4.1.3 Analysis of Year 2008The event date analysis of year 2008(Table- 08) has a t-statistics of 1.693913108 and reflects that nullhypothesis is accepted across different significance levels with no statistically significant marketreaction. The t-statistic of post event date is -1.367495169 signifying the acceptance of the nullhypothesis.The sector-wise analysis revealed that Investment and Miscellaneous have abnormal returns of 39.92%and 48.16% in the event datewhereas NBFI with 16.94% and Insurance with -29.65% abnormal returnsin the post event date. All the others lack in statistical significance in producing any abnormal return(Table- 09).4.1.4 Analysis of Year 2009 18
    • 8. Research Journal of Finance and Accounting www.iiste.orgISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 2, 2012The t-statistics are -4.125462153 and -1.418281789 respectively and reflect that alternative hypothesisis accepted with significant market reaction in the event date (Table- 10). At the event date abnormalreturns have an impact of -33.015%.In case of sector-wise analysis of 2009 (Table- 11) in the event date Insurance (only with 5%significance level), Food& Auxiliary, Fuel and Miscellaneous analysis banks have significant marketreaction. The abnormal returns have a negative effect of 21.42%, 97.66%, 50.98% and 135.06%. Inpost event date no reaction was observed except for Miscellaneous with a negative reaction of 66.33%.4.1.5 Analysis of Year 2010The analysis of year 2010 reveals the fact that alternative hypothesis isrejected forboth the cases andimplies no significant announcement effect (Table- 12).Analysis showed that sectors naming Bank, Insurance, Cement & Ceramic (only at 5% significancelevel), Engineering,Miscellaneous and Pharmaceuticals & Chemicals exerted impact on the event datewith 1.9%, -38.16%, 6.89%, -18.15%, -40%, -18.72%. On the other hand Investment (with -18.39%and -66.6%), Fuel (with -12.45% and -9.07%) and Textile (with -79.44%, 15.57%)have impacted onboth event and post event date.Therefore after conducting and analyzing all the facts and figures it is worth mentioning that in yearevent date mostly showed announcement effect as in 2006, 2007 and 2009 the null hypothesis gotrejected. This conclusion coincides with the findings of Gordon (1959), Ogden (1994), Stevens andJose (1989), Kato and Loewenstein (1995), Ariff and Finn (1986), and Lee (1995) as they had foundstatistically significant above average stock market return after cash dividend announcement. On theother hand academicians like Easton and Sinclair (1989) found instances where after cash dividendannouncement stock market return was statistically significant negative. Even though for the post eventdate there was no presence of abnormal returns.5. ConclusionThe corporate managers issue dividends every now and then according to the need of their clientele.But why they issue dividend has drawn interest of many scholars nonetheless the proper reasoning isyet to discover. Although it is found that the market does react whenever there is a cash dividendannouncement implying scope for investors to earn abnormal returns. This particular study is done toidentify that kind of reactions that market exhibits. And the findings are very exhilarating.Even though cash dividend announcement is known as an event which will not impact the market pricein a perfect market but in case of Bangladesh some market reaction has been identified in this study aspractically the existence of perfect market is in question. The study also reveals that in the year2008and 2010 the market did not reacted that much which could prove to be statistically significant. Onthe other hand in 2006, 2007 and 2009 market showed significant reaction in terms of abnormal returnsimplying that investors did earned predictable return and outperformed (under-performed where theeffect was negative) the market on the event date in most cases. As event study methodology can beused to indicate the market efficiency in the semi form but merely based on this parametric test itwould be a very bold comment rather it is useful to make a conclusion about the reaction which couldprove to be the basis for further study in this area.ReferencesAharony, J. & Swary, J. (1980), “Quarterly Dividend and Earnings Announcements and StockholdersReturns: An Empirical Analysis”, Journal of Finance, 35, 1-12.Ariff, M. & Finn, F.J. (1986), “Announcement Effects and Market Efficiency in a Thin Market: AnEmpirical Application to the Singapore Equity Market”, Asia Pacific Journal of Management, 6, 243-267.Asquith, P. & Mullins, D. (1983), “The Impact of Initiating Dividend Payments on ShareholderWealth”, Journal of Business, 56, 77-96.Bajaj, M. & Vijh, A. (1995), “Trading Behavior and the Unbiasedness of the Market Reaction toDividend Announcements”, Journal of Finance, 50(1), 255-79. 19
    • 9. Research Journal of Finance and Accounting www.iiste.orgISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 2, 2012Ball, R. & Philip, B. (1968), “An Empirical Evaluation of Accounting Income Numbers”, Journal ofAccounting Research, 159-178.Bernard, L. & Thomas, K. (1989), “Post Earnings Announcement Drift: Delayed Price Response orRisk Premium?”, Journal of Accounting Research, 27, 1-36.Bhattacharya, S. (1979), “Imperfect Information, Dividend Policy, and the ‘Bird in Hand’ Fallacy”,The Bell Journal of Economics, 10, 259-70.Bremer, M. & Sweeny, R. (1991), “The Reversal of Large Stock Price Decreases”, Journal of Finance,46, 747-754.Dann, L.Y. (1981), “Common Stock Repurchases: An Analysis of Returns to Bondholders andStockholders”, Journal of Financial Economics, 9.De Bondt, W. & Thaler, R. (1985), “Does the Stock Market Overreact?” Journal of Finance, 40, 793-808.Eades, K.M. (1982), “Empirical Evidence on Dividends as a Signal of Firm Value”, Journal ofFinancial and Quantitative Analysis, 17, 471-500.Eades, K.M., Hess, P.J. & H.E. Kim (1985), “Market Rationality and Dividend Announcements”,Journal of Financial Economics, 14, 581-604.Easton, S.A. & Sinclair, N.A. (1989), “The Impact of Unexpected Earnings and Dividends onAbnormal Returns to Equity”,Accounting & Finance, 29, 1-19.Fama, E.F. & Miller. M.H. (1972), The Theory of Finance, New York: Holt, Rinehart and Winston.Fisher, B. & Scholes, M. (1974), “The Effects of Dividend Yield and Dividend Policy on CommonStock Prices and Returns”, Journal of Financial Economics, 1, 1-22.Foster, G. Olsen, C. & Shevlin, T. (1984), “Earnings Releases, Anomalies, and the Behavior ofSecurity Returns”, The Accounting Review, 59, 574-603.Gordon, M.J. (1959), “Dividend, Earning, and Stock Prices”, The Review of Economics and Statistics,41, 99-105.Grundy, B.D., & M. McNichols (1989), “Trade and Revelation of Information through Prices andDirect Disclosure”, Review of Financial Studies, 2, 495-526.Healy, P. & Krishna, P. (1988), “Earnings Information Conveyed by Dividend Initiations andOmissions”, Journal of Financial Economics, 21, 149-175.Jensen, M. & Meckling, W. (1976), “Theory of Firm: Managerial Behaviour, Agency Cost, andOwnership Structure”, Journal of Financial Economics, 3, 306-360.Kalay, A. (1980), “Signaling, Information Content, and the Reluctance to Cut Dividends”, Journal ofFinancial and Quantitative Analysis, 15, 855-69.Kalay, A. & Loewenstein, U. (1985), “Predictable Events and Excess Returns: The Case of DividendAnnouncements”, Journal of Financial Economics, 14, 423-450.Karpoff, J.M., & R.A. Walkling (1988), “Short-term Trading Around Ex-dividend Days: AdditionalEvidence”, Journal of Financial Economics. 21, 291-298.Kato, K. & Loewenstein, U. (1995), “The Ex-Dividend-Day Behavior of Stock Prices: The Case ofJapan”, The Review of Financial Studies, 8, 816-847.Kim, O., & Verrocchio, R.E. (1991), “Trading Volume and Price Reactions to Public Announcements”,Journal of Accounting Research, 29, 302-321.Kritzman, Mark. P. (1994), “What Practitioners Need To Know: About Event Studies”, FinancialAnalysts Journal, 17-20.Kwan, C.Y. (1981), “Efficient Market Tests of the Informational Content of DividendsAnnouncements”, Journal of Financial and Quantitative Analysis, 16, 193-205.Lee, B.S. (1995), “The Response of Stock Prices to Permanent and Temporary Shocks to Dividends”,Journal of Financial and Quantitative Analysis, 30, 1-22. 20
    • 10. Research Journal of Finance and Accounting www.iiste.orgISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 2, 2012Lo, A.W. & MacKinlay, A.C. (1997), The Econometrics of Financial Markets, Princeton: PrincetonUniversity Press.Michaely, R., Thaler, H. & Womack, L. (1995), “Price Reactions to Dividend Initiations andOmissions: Overreaction or Drift?”, Journal of Business, 50(2), 573-608.Miller, M.H. & Modigliani, F. (1958), “The Cost of Capital, Corporation Finance, and The Theory ofInvestment”, American Economic Review, 48, 261-97.Miller, M.H. & Modigliani, F. (1961), “Dividend Policy, Growth, and the Valuation of Shares”,Journal of Business, 38, 411-33.Ogden, J.P. (1994), “A Dividend Payment Effect in Stock Returns”, Financial Review, 29, 345-369.Shefrin, M. & Statman, M. (1984), “Explaining investor preference for cash dividends”, Journal ofFinancial Economics, 13, 253-282.Stevens, J.L. & Jose, M.L. (1992), “The Effect of Dividend Payout, Stability, and Smoothing on FirmValue”, Journal of Accounting Auditing & Finance, 7, 195-216.Uddin, H. (2003), “Effect of Dividend Announcement on Shareholders’ Value: Evidence from DhakaStock Exchange”, [accessed 10November 2011]Vermaelen, T. (1981), “Common Stock Repurchases and Market Signaling: An Empirical Study”,Journal of Financial Economics, 9, 139-84.Woolridge, R. (1983), “Dividend Changes and Security Prices”, The Journal of Finance, 38(5), 1607-1615. 21
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