Does the Dividend Announcement Matter in the Indian Stock Market?

Abstract

Over the past few years, many firms have announced dividends which give conclusive but indirect signal to the investors. The Dividend is declared to show sufficient profitability to finance future expansion in the firms. Dividend declarations have become an important area in financial research considering its strong implications for corporate policy. The article investigates the signalling effect of the dividend announcements and also the significance of cumulative abnormal return of dividend announcements before and after the event day. Further it also tests the evidence of average abnormal return around the announcement date. The analysis uses data of 42 firms in the BSE 500 index, which have announced dividends during the period 2007–2009. An examination of share price behaviour around dividend announcements proves the signalling effect of these announcements. These results strongly support that the share prices drift positively in the case of dividend announcements and the market particularly reacts more favourably to dividend announcements.