Market Reaction to Stock Dividends: Evidence from India

Abstract

Theoretically, stock dividends have no impact on financial position of the announcing company as net worth and total assets remain the same, though empirical evidence across the globe shows that markets react to stock dividend announcements. The present study analyses the market reaction pertaining to stock dividend decisions in the Indian context. Market reaction has been captured in terms of impact on returns, liquidity, and risk. The sample includes 51 ‘pure’ stock dividend announcements from January 1, 2002 to June 30, 2010. The study finds that the announcement of stock dividends induces an increase in the wealth of the shareholders in India. A consistent pattern of positive average abnormal returns during the pre-announcement window till the announcement day and a pattern of negative average abnormal returns during the post-announcement window have been observed. On cumulating these results, the shareholders of the companies that issued stock dividends gain significant returns. The justification for such results seems to be that the information about the stock dividends announcement reaches the investors prior to the decision date as it is manda-tory for the issuing company to inform the exchange (where it is listed) about the date of the board meeting. It has been observed that the companies usually inform the exchange seven days prior to the day of the board meeting. In most of the cases, the companies provide the agenda item information along with the board meeting date to the exchange. In such a situation, the moment this information about the agenda item is given to the exchange, this becomes public information and investors start reacting to it. The cumulative average abnormal return values over various size event windows depict that an investor can earn substantial returns if he purchases the shares on the day the news of board meeting (to announce stock dividends) comes to the market and sells them one day after the announcement day. The investor can also gain if the shares are purchased one day prior to the announcement day and are sold one day after the announcement day. The trading quantity reduces significantly immediately after these decisions are announced. On a short-term basis, the investors seem to perceive that the announcement of stock dividends provides signals about the firm's bright future prospects. This leads to a decline in trading quantity as investors, who own the shares at the time of announcement, prefer to hold the shares expecting an increase in their wealth in future. In the long-run, a marginally positive impact has been observed. The announcement of stock dividends reduces variability of returns in the short-run as well as in the long run, lending price stability to the stocks of the announcing companies.

Market Response to Dividend Announcement in Southeast Asian Emerging Markets

“…It can be seen that the abnormal return in the Philippines has a positive average. The existence of a positive average abnormal return on the stock market in the Philippines is in accordance with research conducted by Mehta et al [10] which found a positive market reaction in India. This positive reaction shows that investors believe this dividend announcement is a good signal and will be profitable for them.…”

Market Reaction to Dividend Announcements Before and During COVID-19 - Evidence from Banking Sector

“…Further, it is observed that the information is absorbed faster in a larger firm. Similarly, Mehta et al, (2014) found that the dividend announcement induces an increase in the wealth of the shareholders. Anwar et al, (2015;2017) examined the impact of the cash dividend on the stock return and provided strong evidence supporting the 'dividend signalling' and 'risk information' hypothesis.…”

“…Considering the reaction of the Indian Stock market, there exist minimal studies; among them, studies by Mallikarjunappa & Manjunatha (2009), Kumar & G (2013), Mehta et al, (2014) Anwar et al, (2017) observed the significance and positive impact of the dividend announcements on stock return, whereas Saravanakumar (2011), Anwar et al, (2015) found no significant impact of the announcements. On the other hand, Berezinets et al, (2015) and Kumar (2017) found that increased dividend has a positive impact and decreased dividend hurt stock return.…”

Effect of Ex-Dividend Date on Stock Returns of Nifty Stocks in India

“…(Garrett & Priestley, 2000) find significant evidence of dividend smoothing and dividend conveying information regarding unexpected positive changes in current permanent earnings. (Mehta, Jain, & Yadav, 2014) Study on Stock dividend shows that announcements induce an increase in the wealth of the shareholders. In India there is price stability.…”