Dividend Signalling And Market Efficiency In Emerging Economy: A Study of Indian Stock Market

Jitendra Kumar Sharma, Vijay Shankar Pandey


This paper applies GARCH (p, q) model and non-parametric Run test for studying isolated events of dividend change announcements covering a period of ten years for capturing abnormal returns in the Indian Stock Market using an event window of 61 days.  The results indicate that there is no signalling effect of ‘dividend increase/decrease along with financial results announcement’ event on the share price of companies. Cumulative abnormal return tendency is observed if share purchase is made prior to any of the events. It is also found that adjustment in prices after event date takes place with a substantial time lag reflecting inefficiencies in the market.

Keywords: Signalling effect; market efficiency; dividend announcement; event study; emerging economy

Full Text:



Abdullah, N. A. H., Rashid, R. A., Ibrahim, Y. (2004). Information Content of Dividend Changes in Emerging Market. International Journal of Banking and Finance 2(1), 1-18. Available: http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1033&context=ijbf

Abeyratna, G., Lonie, A.A., Power, D.M., Sinclair, C.D. (1996). The Influence of Company Financial Performance on the Interpretation of Dividend and Earnings Signals: A Study of Accounting-and Market-Based Data. The British Accounting Review 28(3), 229-247. Available:http://www.sciencedirect.com/science/journal/08908389/28/3

Adelegan, O. J. (2003). Capital Market Efficiency and the Effect of Dividend announcements on Share Prices in Nigeria. African Development Review 15(2/3), 218-236. Available: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8268.2003.00072.x/pdf/

Aharony, J., Swary, I. (1980). Quarterly Dividend and Earnings Announcements and Stockholders' Returns: An Empirical Analysis. Journal of Finance 35(1), 1-12. Available: http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1980.tb03466.x/abstract.

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. Available: http://www.lahoreschoolofeconomics.edu.pk/JOURNAL/LJE%20Vol15-%20No.12010/5%20Akbar &_Baig%20EDITED%20AC.pdf

Bachelier, L. (1900). Théorie de la Spéculation, Annales Scientifique de l'ÉcoleNormaleSupérieure, 3esérie, tome 17, 21-86. [English translation in The Random Character of Stock Market Prices, Paul H. Cootner (editor), M.I.T press, 1964, 256. Available: http://www.jstor.org/stable/168800

Benesh, A. G., Keown, A. J., Pinkerton, J. M., (1984). An Examination of Market Reaction to Substantial Shifts in Dividend Policy. The Journal of Financial Research 7 (2), 131-142. Available: http://web.a.ebscohost.com/bsi/pdfviewer/pdfviewer?vid=101&sid=3c06a403-7e21-4f60-a9a5-4dc500c30582%40sessionmgr4001&hid=4206

Bernheim, B. D.,Wantz, A. (1995). A Tax-Based Test of Dividend Signalling Hypothesis. American Economic Review 85(3), 532-551. Available: http://www.jstor.org/stable/2118186

Bhatia, P. (2010). A Study of Dividend Announcements on Stock Returns of Popularly Traded Companies in India. Asia Pacific Journal of Research in Business Management 1 (3), 178-189. Available: http://www.indianjournals.com/ijor.aspx?target=ijor:apjrbm& volume =1&issue=3&article=013

Bhattacharya, S., (1979). Imperfect Information, Dividend Policy, and "The Bird in the Hand” Fallacy. The Bell Journal of Economics 10(1), 259-270. Available: http://www.jstor.org/stable/3003330

Bollerslev, T. (1987). A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return. The Review of Economics and Statistics 69, 542-547. Available:http://web.a.ebscohost.com/bsi/resultsadvanced?sid=3c06a403-7e21-4f60-a9a5-4dc500c30582%40sessionmgr4001&vid=108&hid=4206&bquery=TI+%28A+Conditionally+Heteroskedastic+Time+Series+Model+for+Speculative+Prices+AND+Rates+%22of%22+Return%29&bdata=JmRiPWJ0aCZ0eXBlPTEmc2l0ZT1ic2ktbGl2ZQ%3d%3d

Borges, M. R. (2010). Efficient Market Hypothesis in European Stock Markets. The European Journal of Finance 16 (7), 711-726. Available: http://web.a.ebscohost.com/bsi/resultsadvanced?sid=3c06a403-7e21-4f60-a9a5-4dc500c30582%40sessionmgr4001&vid=110&hid=4206&bquery=TI+Efficient+Market+Hypothesis+%22in%22+European+Stock+Markets.&bdata=JmRiPWJ0aCZ0eXBlPTEmc2l0ZT1ic2ktbGl2ZQ%3d%3d

Chang, S.J., Chen, S., (1991). Information Effects of Earnings and Dividend Announcements on Common Stock Returns: Are They Interactive? Journal of Economics & Business 43 (2), 179-192. Available: http://www.sciencedirect.com/science/article/pii/014861959190017Q

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.

Available at SSRN: http://ssrn.com/abstract=313467

Conroy, R. M., Eades, K.M., Harris, R. S. (2000). A Test of the Relative Pricing Effects of Dividends and Earnings: Evidence from Simultaneous Announcements in Japan. The Journal of Finance 55(3), 1199- 1227. Available: http://www.jstor.org/stable/222450

Cooray, A., Wickremasinghe, G. (2007). The Efficiency of Emerging Stock Markets: Empirical Evidence from the South Asian Region. The Journal of Developing Areas 41(1), 171-183. Available: http://ro.uow.edu.au/commpapers/564

Dhillon, U. S., Johnson, H., (1994). The Effect of Dividend Changes on Stock and Bond Prices. The Journal of Finance 49 (1), 281-289. Available: http://www.jstor.org/stable/2329145

Dielman, T. E., Oppenheimer, H.R. (1984). An Examination of Investor Behavior During Periods of Large Dividend Changes. Journal of Financial & Quantitative Analysis 19 (2), 197-216. Available: http://www.jstor.org/stable/2330898

Easton, S. (1991). Earnings and Dividends: Is There an Interaction Effect? Journal of Business Finance & Accounting 18(2), 255-266. Available: http://onlinelibrary.wiley.com/doi/10.1111/j.1468-5957.1991.tb00592.x/abstract

Fama, E. F., Fisher, L., Jensen, M.C., Roll, R. (1969). The Adjustment of Stock Prices to New Information. International Economic Review 10 (1), 1-21. Available: http://www.jstor.org/stable/2525569

Gunasekarage, A., Power, D. M. (2002). The Post-Announcement Performance of Dividend-Changing Companies: The Dividend-Signalling Hypothesis Revisited. Accounting and Finance 42, 131-151. Available: file:///F:/Paper%2021.10.14/SSRN-id320417.pdf

Hossain, M. F., Siddiquee, M. M., Rahman, M. I. (2006). Dividend Surprise and Market Reaction: Evidence from Dhaka Stock Exchange (DSE). The South Asian Journal of Management 13(4), 42-63. Available: http://ssrn.com/abstract=952188

Irum, M., Rafique, M., Hassan, A. (2012). Effect of Dividend Announcement on Share Price of Petroleum Industry of Pakistan. Journal of Basic and Applied Scientific Research 2(7), 6503-6511. Available: http://www.textroad.com/Old%20Version/pdf/JBASR/J.%20 Basic.%20Appl.%20Sci.%20Res.,%202(7)6503-6511,%202012.pdf

John, K., Williams, J. (1985). Dividends, Dilution, and Taxes: A Signalling Equilibrium. The Journal of Finance 40 (4), 1053-1070. Available: http://www.jstor.org/stable/2328394

Jong, d. F. (1992). A Contribution to Event Study Methodology with an Application to the Dutch Stock Market. Journal of Banking and Finance 16 (1), 11-36. Available: http://www.sciencedirect.com/science/article/pii/037842669290076C

Kane, A., Lee, Y.K., Marcus A. (1984). Earnings and Dividends Announcements: Is There a Corroboration Effect? The Journal of Finance 39 (4), 1091-1099. Available: http://www.jstor.org/stable/2327614

Kumar, S., Mahadevan, A., Gunasekar, S. (2012). Market Reaction to Dividend Announcement: An Empirical Study Using Event Study Technique. Prestige International Journal of Management & IT-Sanchyan 1 (1):141-153. Available: http://www. pjitm.com/doc/papers/paper-9.pdf

Lang, Larry H. P., Litzenberger, R. H. (1989). Dividend Announcements Cash Flow Signalling vs. Free Cash Flow Hypothesis? Journal of Financial Economics 24 (1), 181-191. Available: http://www.sciencedirect.com/science/article/pii/0304405X89900779

Laub, P. M. (1976). On the Informational Content of Dividends. The Journal of Business 49 (1), 73-85. Available: http://www.jstor.org/stable/2353441

Lintner, J. (1956). Distribution of Incomes of Corporations Among Dividends, Retained Earnings, and Taxes. American Economic Review 46(2), 97-113. Available: http://www.jstor.org/stable/1910664

Miller, M. H., Rock, K. (1985). Dividend Policy Under Asymmetric Information. The Journal of Finance 40(4), 1031-1051. Available: http://www.jstor.org/stable/2328393

Pathirawasam, C. (2009). The Information Content of Stock Dividend Announcements: Evidence from Sri Lanka. Central European Review Issue 12, 103-114. Available: https://www.google.co.in/?gfe_rd=cr&ei=uiRGVLGiLNTFuATsgoBw&gws_rd=ssl#q=The+Information+Content+of+Stock+Dividend+Announcements%3A+Evidence+from+Sri+Lanka

Pettit, R. R. (1972). Dividend Announcements, Security Performance, and Capital Market Efficiency. The Journal of Finance 27 (5), 993-1007. Available: http://online library. wiley.com/doi/10.1111/j.1540-6261.1972.tb03018.x/abstract

Pynnonen, S. (2005). On Regression Based Event Study. In Contribution to Accounting, Finance and Management Science. Essay in Honour of Professor TimoSalmi. ActaWasaenia. No. 143, 327-354. Available: http://lipas.uwasa.fi/~sjp/articles/sp_acta_ wasaensia_143_ 327-354.pdf

Rahman, M. L., Amin, M. R., Siddikee, M. N. (2012). Declaration Effect of Cash & Stock Dividend on Share Price: An Empirical Study on Dhaka Stock Exchange. Asian Business Review 1 (1), 72-79. Available: http://oaji.net/articles/800-1398835862.pdf

Ross, S.A., (1977). The Determination of Financial Structure: The Incentive-Signalling Approach. Bell Journal of Economics 8(1), 23-40. Available: http://www.jstor.org /stable/3003485

Ryan, P. A., Besley, S., Lee, H. W. (2000). An Empirical Analysis of Reactions to Dividend Policy Changes for NASDAQ Firms. Journal of Financial and Strategic Decisions 13(1), 35-44. Available: www.studyfinance.com/jfsd/pdffiles/v13n1/ryan.pdf

Saleem F., Zafar, L., Anwar, S., Tariq, S., Khurshid H., Karim, U. (2013). Effect of Dividend Announcement on Stock Prices: Evidence from Pakistan. Interdisciplinary Journal of Contemporary Research Business 4(9), 211-224. Available: journal-archieves27 .webs.com/211-224.pdf

Serra, A. P. (2002). Event study tests: A Brief Survey. Working papers FEP No. 117, 1-14, www.fep.up.pt da. Available: www.fep.up.pt/investigacao/workingpapers/wp117.pdf

Sharma, R. (2011). Stock Price Behaviour Around Dividend Announcements: An Event Study Methodology. Vilakshan: The XIMB Journal of Management 8(2), 23-31. Available: http://connection.ebscohost.com/c/articles/69584050/stock-price-behaviour-around-dividend-announcements-event-study-methodology

Taneem, S., Yuce, A. (2011). Information Content of Dividend Announcements: An Investigation of the Indian stock Market. International Business & Economic Research Journal 10 (5), 49-57. Available: http://www.econbiz.de/Record/information-content-of-dividend-announcements-an-investigation-of-the-indian-stock-market-taneem-shania/10009315148

Travios, N., Trigeorgis, L., Vafeas, N. (2001). Shareholder Wealth Effects of Dividend Policy Changes in an Emerging Stock Market: The Case of Cyprus. Multinational Finance Journal 5(2), 87-112. Available: http://www.mfsociety.org/modules/modDashboard /uploadFiles/journals/googleScholar/696.html

Uddin, M. H., Chaudhary, G. M. (2005). Effect of Dividend Announcement and Shareholders’ Value: Evidence from Dhaka Stock Exchange. Journal of Business Research 7, 61-72. Available: http://bdresearch.org/home/attachments/article/396/EFFECT %20OF%20DIVIDEND%20ANNOUNCEMENT-Md.%20Hamid%20Uddin.pdf

Woolridge, J. R. (1983). Dividend Changes and Security Prices. Journal of Finance 38 (5), 1607-1614. Available: http://www.jstor.org/stable/2327590

Yoon, P.S., Starks, L. T. (1995). Signalling Investment Opportunities and Dividend Announcements. Review of Financial Studies 8 (4), 995 – 1018. Available: http://rfs. oxfordjournals.org/content/8/4/995.abstracts


  • There are currently no refbacks.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

2013-2017 (CC-BY) Australian International Academic Centre PTY.LTD.

International Journal of Finance and Accounting Studies

You may require to add the 'aiac.org.au' domain to your e-mail 'safe list’ If you do not receive e-mail in your 'inbox'. Otherwise, you may check your 'Spam mail' or 'junk mail' folders.