Market reactions to dividends

Market Reactions to Dividends

Prepared By: Shyam MistryRoll No: 20

Guided BY: Prof. Neeraj K. Yajnik Sir

IntroductionIt is widely accepted in financial theory that a company’s dividend policy has a non-trivial impact on the wealth of its shareholders. Empirical evidence indicates that corporate announcements of dividend pay-outs are typically associated with significant price effects.

If investors prefer capital gains to dividend pay-outs (e.g. due to tax reasons), higher dividends will cause a decrease in demand for equity, leading stock prices to fall. Alternatively, investors will seek to buy stocks that pay low dividends, inducing stock prices to rise.

Meanings

Stock means:

Market means:

What is Stock Market?

What is Dividend?

What is Ex-Dividend?

Declaration Date:

Effective Date:

What is Dividend Policy?

Reviewing empirical literatureDividend as the main method of distributing cash to shareholders has received considerable prior attention in the finance literature. Lintner (1956) suggests that firms prefer to smooth their dividend and reluctant to change their pay-out policy. The management is reluctant to cut dividend because it might send negative signal to investor and reluctant to increase pay-out for fear that it might not sustainable in the future.

Docking and Koch (2005) find that stock market reaction to dividend announcement is sensitive to the direction or volatility of the stock market.

Asquith and Mullins (1983) (dividend initiations), Healy and Palepu (1988), and Michaely, Thaler, and Womack (1995) (dividend omissions)—showed that the market reacts dramatically to such announcements.

Research methodologyRational of the StudyStock Markets are very sensitive. When we talk about Indian Stock Market, it is clear that Indian Stock Market is more volatile than other stock markets. Indian Markets like NSE and BSE reacts to much information which in market day to day. Information like Dividend Announcement dates, Stock splits, Government Policies, Companies’ Quarterly Results etc. Dividends are most attractive part for investors.It is widely known that when divided announces stock prices are tend to down. So here in this research I want to see that what the reactions of markets are when dividend announces, what are the reactions when dividends come in effect.

ObjectivesTo investigate market reactions to announced changes in dividend policies.

To investigate whether the market treats announcements of dividend initiations (good news) and omissions (bad news) symmetrically or whether price reactions to omissions are greater than for initiations.

Research designUniverse: Stock listed in Bombay Stock Exchange (BSE).

Sampling Unit: BSE A group Companies

Sampling period: Year 2009 to 2011 Daily price

Sample size: 20 Companies (Three consecutive years)

Sampling Method: Random Sampling Method

Sources of data:Primary Data:Research does not contain any primary survey.Secondary Data: Data available on http://www.moneycontrol.com/stocksmarketsindia/, http://beta.bseindia.com/.

http://www.moneycontrol.com/stocksmarketsindia/

http://beta.bseindia.com/

Research Analysis ToolsResearch tool is Market Model Approach i.e. (MM).

ai = ẏ-(ß*ẍ)

ßi = (x-ẍ) × (y-ẏ) / (x-ẍ)2

Stock and Index return = (P1 – P0/P0)* 100

Abnormal Return = Stock Return – Market Model Return

Data Analysis

ABB Time Line Date α of Stock βof Stock Average Abnormal Return

2011 Before Announcement Date

23-02-2011 -0.203596387 0.164831923 0.026817286

Between Announcement & Effective Date

-0.015355551 0.255271269 0.45510002

After Effective Date 02-05-2011 -0.192056239 0.265098482 0.349484456


26-02-2010 0.00122615 0.400432107 0.089162624


0.154111363 0.115380755 -0.311119162



20-02-2009 0.0710812 0.4379933 -0.42989703


0.5255089 0.2651362 -0.327997367

After Effective Date 11-05-2009 0.0146856 0.5692809 1.481797228

21/Jan/0

9

16/Feb/0

9

14/Mar/

09

09/Apr/0

9

05/May

/09

31/May

/09

26/Jun/0

9

22/Jul/0

9

17/Aug/0

9

12/Sep/0

9

08/Oct/

09

03/Nov/0

9

29/Nov/0

9

25/Dec/

09

20/Jan/1

0

15/Feb/1

0

13/Mar/

10

08/Apr/1

0

04/May

/10

30/May

/10

25/Jun/1

0

21/Jul/1

0

16/Aug/1

0

11/Sep/1

0

07/Oct/

10

02/Nov/1

0

28/Nov/1

0

24/Dec/

10

19/Jan/1

1

14/Feb/1

1

12/Mar/

11

07/Apr/1

1

03/May

/11

29/May

/11

-20

-10

0

10

20

30

40

50

Cumulative Abnormal Return


ACC Time Line Date α of Stock βof Stock Average Abnormal Return


03-02-2011 -0.4304758 0.15034639 0.146401802


3.551E-05 0.67500986 0.08562241



04-02-2010 -0.2653909 0.31747427 0.101868912


0.1182541 0.31749113 0.165908832

After Effective Date 23-03-2010 0.0953772 0.08163334 -0.387826326


05-02-2009 -0.6088603 0.23397694 1.014574168


0.0817116 0.59365856 -0.045063691


06/Jan/0

9

02/Feb/0

9

01/Mar/

09

28/Mar/

09

24/Apr/0

9

21/May

/09

17/Jun/0

9

14/Jul/0

9

10/Aug/0

9

06/Sep/0

9

03/Oct/

09

30/Oct/

09

26/Nov/0

9

23/Dec/

09

19/Jan/1

0

15/Feb/1

0

14/Mar/

10

10/Apr/1

0

07/May

/10

03/Jun/1

0

30/Jun/1

0

27/Jul/1

0

23/Aug/1

0

19/Sep/1

0

16/Oct/

10

12/Nov/1

0

09/Dec/

10

05/Jan/1

1

01/Feb/1

1

28/Feb/1

1

27/Mar/

11

23/Apr/1

1

-10

0

10

20

30

40

50

60



Bajaj Hold. & Inv.

Time Line Date α of Stock βof Stock Average Abnormal Return


18-05-2011 -0.2525255 0.2263128 0.311121855


0.138684 0.2487166 -0.261855918



12-05-2010 -0.2311853 0.265105 0.497408115


0.0548015 0.083399 0.138536805

After Effective Date 08-07-2010 0.1457487 -0.097288 0.004516511


21-05-2009 0.6039763 0.4992593 0.073034213


0.190554 0.1858962 -0.010430453


22/Apr/0

9

18/May

/09

13/Jun/0

9

09/Jul/0

9

04/Aug/0

9

30/Aug/0

9

25/Sep/0

9

21/Oct/

09

16/Nov/0

9

12/Dec/

09

07/Jan/1

0

02/Feb/1

0

28/Feb/1

0

26/Mar/

10

21/Apr/1

0

17/May

/10

12/Jun/1

0

08/Jul/1

0

03/Aug/1

0

29/Aug/1

0

24/Sep/1

0

20/Oct/

10

15/Nov/1

0

11/Dec/

10

06/Jan/1

1

01/Feb/1

1

27/Feb/1

1

25/Mar/

11

20/Apr/1

1

16/May

/11

11/Jun/1

1

07/Jul/1

1

-10

0

10

20

30

40

50

60



Britannia Ind.



27-05-2011 -0.286833 0.07070304 0.415021515


-0.010707 0.11647719 0.621346633



28-05-2010 -0.252877 0.80340887 0.511766967


0.15972 0.07300848 0.183074682



27-05-2009 0.3418886 1.36323116 -1.374331004


0.4268136 -0.4336988 -0.920680698


28/Apr/0

9

24/May

/09

19/Jun/0

9

15/Jul/0

9

10/Aug/0

9

05/Sep/0

9

01/Oct/

09

27/Oct/

09

22/Nov/0

9

18/Dec/

09

13/Jan/1

0

08/Feb/1

0

06/Mar/

10

01/Apr/1

0

27/Apr/1

0

23/May

/10

18/Jun/1

0

14/Jul/1

0

09/Aug/1

0

04/Sep/1

0

30/Sep/1

0

26/Oct/

10

21/Nov/1

0

17/Dec/

10

12/Jan/1

1

07/Feb/1

1

05/Mar/

11

31/Mar/

11

26/Apr/1

1

22/May

/11

17/Jun/1

1

13/Jul/1

1

08/Aug/1

1

-10

0

10

20

30

40

50

60

70

80

90



Chambal Fertil.



11-05-2011 -0.133562393 0.20472193 -0.062928442


-0.244781791 0.20025916 0.638907599



10-05-2010 -0.077689405 0.23914417 -0.189582755


0.020844098 0.17724465 0.175906306



15-05-2009 0.393679481 0.40917363 -0.522689862


0.339347472 0.39303988 -0.121250118


16/Apr/0

9

14/May

/09

11/Jun/0

9

09/Jul/0

9

06/Aug/0

9

03/Sep/0

9

01/Oct/

09

29/Oct/

09

26/Nov/0

9

24/Dec/

09

21/Jan/1

0

18/Feb/1

0

18/Mar/

10

15/Apr/1

0

13/May

/10

10/Jun/1

0

08/Jul/1

0

05/Aug/1

0

02/Sep/1

0

30/Sep/1

0

28/Oct/

10

25/Nov/1

0

23/Dec/

10

20/Jan/1

1

17/Feb/1

1

17/Mar/

11

14/Apr/1

1

12/May

/11

09/Jun/1

1

07/Jul/1

1

04/Aug/1

1

01/Sep/1

1

-20

0

20

40

60

80

100

120



Colgate Palm.



28-02-2011 -0.0897038 0.3966014 0.017319942


0.391096 0.5802192 -0.624528584



12-03-2010 0.353534 0.182156 -0.271674424


0.1866136 -0.0035459 -0.434807281



05-11-2009 -0.3588097 0.3031181 0.878088304


0.2863221 0.1059293 -0.398867732


06/Oct/

09

24/Oct/

09

11/Nov/0

9

29/Nov/0

9

17/Dec/

09

04/Jan/1

0

22/Jan/1

0

09/Feb/1

0

27/Feb/1

0

17/Mar/

10

04/Apr/1

0

22/Apr/1

0

10/May

/10

28/May

/10

15/Jun/1

0

03/Jul/1

0

21/Jul/1

0

08/Aug/1

0

26/Aug/1

0

13/Sep/1

0

01/Oct/

10

19/Oct/

10

06/Nov/1

0

24/Nov/1

0

12/Dec/

10

30/Dec/

10

17/Jan/1

1

04/Feb/1

1

22/Feb/1

1

12/Mar/

11

30/Mar/

11

17/Apr/1

1

-20

-10

0

10

20

30

40



Dabur India



27-04-2011 0.13929649 0.0199098 0.087447673


-0.101516 0.0588309 0.428175518



18-06-2010 0.20053937 0.4796145 -0.320748123


0.07117918 0.155819 0.086084449



29-04-2009 0.91285993 0.1624618 -0.540408984


0.27379448 0.9412768 -0.481414999


31/Mar/

09

27/Apr/0

9

24/May

/09

20/Jun/0

9

17/Jul/0

9

13/Aug/0

9

09/Sep/0

9

06/Oct/

09

02/Nov/0

9

29/Nov/0

9

26/Dec/

09

22/Jan/1

0

18/Feb/1

0

17/Mar/

10

13/Apr/1

0

10/May

/10

06/Jun/1

0

03/Jul/1

0

30/Jul/1

0

26/Aug/1

0

22/Sep/1

0

19/Oct/

10

15/Nov/1

0

12/Dec/

10

08/Jan/1

1

04/Feb/1

1

03/Mar/

11

30/Mar/

11

26/Apr/1

1

23/May

/11

19/Jun/1

1

16/Jul/1

1

-15

-10

-5

0

5

10

15

20

25

30



Grasim Ind.



11-05-2011 -0.0669515 0.32714389 -0.223520484


-0.0708648 0.4075699 0.012789226



20-05-2010 -0.0147284 0.46367152 -0.36671859


0.16557507 -0.0192491 -0.591090212



19-05-2009 0.03985455 0.73060735 0.857606542


-0.0123489 0.37039405 0.447371768


21/Apr/0

9

18/May

/09

14/Jun/0

9

11/Jul/0

9

07/Aug/0

9

03/Sep/0

9

30/Sep/0

9

27/Oct/

09

23/Nov/0

9

20/Dec/

09

16/Jan/1

0

12/Feb/1

0

11/Mar/

10

07/Apr/1

0

04/May

/10

31/May

/10

27/Jun/1

0

24/Jul/1

0

20/Aug/1

0

16/Sep/1

0

13/Oct/

10

09/Nov/1

0

06/Dec/

10

02/Jan/1

1

29/Jan/1

1

25/Feb/1

1

24/Mar/

11

20/Apr/1

1

17/May

/11

13/Jun/1

1

10/Jul/1

1

06/Aug/1

1

02/Sep/1

1

29/Sep/1

1

-30

-20

-10

0

10

20

30

40

50



Hindalco Ind.



30-05-2011 -0.038673 0.33581552 -0.440635309


0.0090027 0.33732472 -0.326325791



04-06-2010 0.1561584 0.40396936 -0.529264933


0.0453006 0.30317459 0.168749528



30-06-2009 -0.100818 0.27307249 0.138388157


-0.020709 0.38862753 0.584239233


02/Jun/0

9

29/Jun/0

9

26/Jul/0

9

22/Aug/0

9

18/Sep/0

9

15/Oct/

09

11/Nov/0

9

08/Dec/

09

04/Jan/1

0

31/Jan/1

0

27/Feb/1

0

26/Mar/

10

22/Apr/1

0

19/May

/10

15/Jun/1

0

12/Jul/1

0

08/Aug/1

0

04/Sep/1

0

01/Oct/

10

28/Oct/

10

24/Nov/1

0

21/Dec/

10

17/Jan/1

1

13/Feb/1

1

12/Mar/

11

08/Apr/1

1

05/May

/11

01/Jun/1

1

28/Jun/1

1

25/Jul/1

1

21/Aug/1

1

17/Sep/1

1

14/Oct/

11

-140

-120

-100

-80

-60

-40

-20

0

20



Jindal Stl. & Power



21-04-2011 0.32532968 0.5714352 -0.357496245


-0.054160032 0.4168271 -0.150903967



04-05-2010 -0.236870446 0.4032278 0.3586504


0.122460786 0.3725594 -0.155094795



27-05-2009 0.723513023 0.351461 0.202651312


0.210421403 0.0411481 -0.605124544


28/Apr/0

9

26/May

/09

23/Jun/0

9

21/Jul/0

9

18/Aug/0

9

15/Sep/0

9

13/Oct/

09

10/Nov/0

9

08/Dec/

09

05/Jan/1

0

02/Feb/1

0

02/Mar/

10

30/Mar/

10

27/Apr/1

0

25/May

/10

22/Jun/1

0

20/Jul/1

0

17/Aug/1

0

14/Sep/1

0

12/Oct/

10

09/Nov/1

0

07/Dec/

10

04/Jan/1

1

01/Feb/1

1

01/Mar/

11

29/Mar/

11

26/Apr/1

1

24/May

/11

21/Jun/1

1

19/Jul/1

1

16/Aug/1

1

13/Sep/1

1

11/Oct/

11

-180

-160

-140

-120

-100

-80

-60

-40

-20

0



LIC Hou. Fin.



28-04-2011 0.06564631 0.271874697 0.021251163


-0.10502652 0.341946091 0.287830079

After Effective Date 04-07-2011 -0.11763284 0.207557278 -0.523703611


28-04-2010 -0.11975004 0.26830935 0.251382093


-0.07664377 0.414737861 0.318587036

After Effective Date 29-06-2010 0.12845806 -0.01587279 0.46281933


23-04-2009 0.51865985 0.193001915 1.309257899


-0.00392179 0.416041212 1.369322786


24/Mar/

09

19/Apr/0

9

15/May

/09

10/Jun/0

9

06/Jul/0

9

01/Aug/0

9

27/Aug/0

9

22/Sep/0

9

18/Oct/

09

13/Nov/0

9

09/Dec/

09

04/Jan/1

0

30/Jan/1

0

25/Feb/1

0

23/Mar/

10

18/Apr/1

0

14/May

/10

09/Jun/1

0

05/Jul/1

0

31/Jul/1

0

26/Aug/1

0

21/Sep/1

0

17/Oct/

10

12/Nov/1

0

08/Dec/

10

03/Jan/1

1

29/Jan/1

1

24/Feb/1

1

22/Mar/

11

17/Apr/1

1

13/May

/11

08/Jun/1

1

04/Jul/1

1

30/Jul/1

1

-20

0

20

40

60

80

100

120

140

160

180



Shree RenukSugars



27-09-2011 -0.01754829 0.412207065 0.156456378


-0.30864134 0.203026033 -1.690170558



22-09-2010 0.24374276 0.203471025 0.372411267


0.13724668 0.169418572 0.541962281



23-09-2009 0.33292595 -0.02596738 -0.051720317


0.36164834 0.429904364 -0.80923904


25/Aug/0

9

19/Sep/0

9

14/Oct/

09

08/Nov/0

9

03/Dec/

09

28/Dec/

09

22/Jan/1

0

16/Feb/1

0

13/Mar/

10

07/Apr/1

0

02/May

/10

27/May

/10

21/Jun/1

0

16/Jul/1

0

10/Aug/1

0

04/Sep/1

0

29/Sep/1

0

24/Oct/

10

18/Nov/1

0

13/Dec/

10

07/Jan/1

1

01/Feb/1

1

26/Feb/1

1

23/Mar/

11

17/Apr/1

1

12/May

/11

06/Jun/1

1

01/Jul/1

1

26/Jul/1

1

20/Aug/1

1

14/Sep/1

1

09/Oct/

11

03/Nov/1

1

-20

-10

0

10

20

30

40

50

60

70

80



Zee Entrt. Enter.



23-06-2011 -0.0819195 0.16630904 0.215440676


0.112421 0.17436564 -0.126497188

After Effective Date 28-07-2011 -0.4745074 0.26630463 -0.134490444


23-09-2010 0.3344446 0.18696198 -0.321044832


0.2718675 0.10044447 -0.714429559



29-06-2009 -0.0283284 0.20880691 0.481421847


0.1489693 0.16671908 0.086711612


01/Jun/0

9

26/Jun/0

9

21/Jul/0

9

15/Aug/0

9

09/Sep/0

9

04/Oct/

09

29/Oct/

09

23/Nov/0

9

18/Dec/

09

12/Jan/1

0

06/Feb/1

0

03/Mar/

10

28/Mar/

10

22/Apr/1

0

17/May

/10

11/Jun/1

0

06/Jul/1

0

31/Jul/1

0

25/Aug/1

0

19/Sep/1

0

14/Oct/

10

08/Nov/1

0

03/Dec/

10

28/Dec/

10

22/Jan/1

1

16/Feb/1

1

13/Mar/

11

07/Apr/1

1

02/May

/11

27/May

/11

21/Jun/1

1

16/Jul/1

1

10/Aug/1

1

-30

-25

-20

-15

-10

-5

0

5

10

15

20



Major Findings: After analyzing all tables and graphs I found that:

Market reacts to the Dividend information and Dividend policy.

Market reactions are different for different stock or scripts.

When Dividends are announced, on that particular date market returns are positive or market will move at its pace, market will not react much.

When dividends are actually given i.e. on effective date market reacts strongly, market gives negative returns.

Market returns are positive between Announcement date and Effective date in most of the stocks. (Here 20 stocks are considered)

Market treats Announcement date of dividends as a Good News while Effective date as a Bad News.

Thank You...

Market reactions to dividends

Economy & Finance

Transcript of Market reactions to dividends