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FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE

Year 2011, Volume: 19 Issue: 1, 1 - 25, 28.06.2011
https://doi.org/10.29228/mjes.143

Abstract

According the dividend signalling hypothesis, it is expected a positive
relationship between dividend change announcements and the subsequent
share price reactions. However, empirical results are not consensual. This
study investigates whether firm-specific factors contribute to explain a
negative market reaction to dividend change announcements, contributing
to the scarce analysis of firm-specific factors explaining the inverse share
price reaction to dividend change announcements. The study applies the
panel data approach to three European markets. The results show that the
market reaction to dividend change announcements is negatively associated
with the firm size. We find that the negative market reaction to dividend
increase announcements is associated with firms that have, on average,
lower dividend changes and higher growth opportunities. Moreover, the
results suggest that a high percentage of dividend negative changes,
decreases the likelihood that the market reacts positively to a dividend
decrease announcement. Globally, we find some evidence for the dividend
signalling hypothesis.

References

  • Abeyratna, G., & Power, D. M. (2002). The Post-announcement Performance of Dividend-changing Companies: The Dividend-signalling Hypothesis Revisited. Accounting and Finance, 42, 131-151.
  • Aharony, J., & Swary, I. (1980). Quarterly Dividend and Earnings Announcements and Stockholders Returns: An Empirical Analysis. The Journal of Finance, 35(1), 1-12.
  • Ahmad, H. & Javid, A. (2009). Dynamics and Determinants of Dividend Policy in Pakistan: Evidence from Karachi Stock Exchange Non-financial Listed Firms. International Research Journal of Finance and Economics, 25, 148-171.
  • Ali, M. B., & Chowdhury, T. A. (2010). Effect of Dividend on Stock Price in Emerging Stock Market: A Study on the Listed Private Commercial Banks in DSE. International Journal of Economics and Finance, 2(4), 52-64.
  • Amihud, Y. and Li, K. (2002). The Declining Information Content of Dividend Announcements and the Effect of Institutional Holdings. Working Paper, Stern School of Business, New York University.
  • Asamoah, G. N. (2010). The Impact of Dividend Announcement on Share Price Behaviour in Ghana. Journal of Business & Economics Research, 8(4), 47-58. Asquith, P., & Mullins, D. W. (1983). The Impact of Initiating Dividend Payments on Shareholder Wealth. The Journal of Business, 56(1), 77-96.
  • Benartzi, S., Michaely, R., & Thaler, R. (1997). Do Changes in Dividends Signal the Future or the Past?. The Journal of Finance, 52(3), 1007-1034.
  • Benesh, G. A., 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.
  • Bhattacharya, S. (1979). Imperfect Information, Dividend Policy, and ‘The Bird in the Hand Fallacy’. Bell Journal of Economics, 10(1), 259-270.
  • Born, J. A., Moser, J. T., & Officer, D. T. (1988). Changes in Dividend Policy and Subsequent Earnings. Journal of Portfolio Management, 14(4), 56-62.
  • 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 & Accounting, 13(2), 101-124.
  • 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.
  • 18 FIRM-SPECIFIC FACTORS & DIVIDEND CHANGE ANNOUNCEMENTS
  • DeAngelo, H., DeAngelo, L., & Skinner, D. J. (1992). Dividends and Losses. The Journal of Finance, 47(5), 1837-1863.
  • Dhillon, U. S., & Johnson, H. (1994). The Effect of Dividend Changes on Stock and Bond Prices. The Journal of Finance, 49(1), 281-289.
  • Eddy, A., & Seifert, B. (1988). Firm Size and Dividend Announcements. The Journal of Financial Research, 11(4), 295-302.
  • Fu, Y., and Morgan, H. (2008). “Dividend Policy and the Signalling Hypothesis: Is the Signalling Hypothesis Still Alive?”, working paper available at http://www.sfu.ca/~hmorgan/sigallinghypothesis-HM,Yufen-spring2008.pdf.
  • Ghosh, C., & Woolridge, J. R. (1988). An Analysis of Shareholder Reaction to Dividend Cuts and Omissions?. The Journal of Financial Research, 11(4), 281- 294.
  • Grullon, G. M. R., & Swaminathan, B. (2002). Are Dividends Changes a Sign of Firm Maturity?. The Journal of Business, 75(3), 387-424.
  • Hausman, J. A. (1978). Specification Tests in Econometrics. Econometrica, 46(6), 1251-1271.
  • Haw, I., & Kim, W. (1991). Firm Size and Dividend Announcement Effect. Journal of Accounting, Auditing and Finance, 6(3), 325-347.
  • Healy, J., Hathorn, J., & Kirch, D. (1997). Earnings and the Differential Information Content of Initial Dividend Announcements. Accounting Enquiries, 6(2), 187-220.
  • Hussin, B. M., Ahmed, A. D., & Ying, T. C. (2010). Semi-strong Form Efficiency: Market Reaction to Dividend and Earnings Announcements in Malaysian Stock Exchange, The IUP Journal of Applied Finance, 16(5), 36-60.
  • Jensen, M. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeover. American Economic Review, 76(2), 323-329.
  • Jiang, W. & Stark, A. (2011). “Dividends, Accounting Information, and the Valuation of Loss-Making Firms in the UK”, working paper, Available at SSRN: http://ssrn.com/abstract=1734287.
  • John, K., & Williams, J. (1985). Dividends, Dilution, and Taxes: A Signalling Equilibrium. The Journal of Finance, 40(4), 1053-1070.
  • Kaplan, S. N., & Zingales, L., (1997). Do Investment-cash Flow Sensitivities Provide Useful Measures of Financing Constraints?. The Quarterly Journal of Economics, 112(1), 169-215.
  • Lamont, O. A., Polk, C., & Saá-Requejo, J. (2001). Financial Constraints and Stock Returns. The Review of Financial Studies, 14(2), 529-554. MARMARA JOURNAL OF EUROPEAN STUDIES 19
  • Lang, L. H. P., & Litzenberger, R. H. (1989). Dividend Announcements: Cash Flow Signalling Versus Free Cash Flow Hypothesis. Journal of Financial Economics, 24(1), 181-191.
  • Lee, H. W., & Ryan, P. A. (2002). Dividends and Earnings Revisited: Cause or Effect?. American Business Review, 20(1), 117-122.
  • Lee, H. W., & Ryan, P. A. (2000). The Information Content of Dividend Initiations and Omissions: The Free Cash Flow and Dividend Signalling Hypotheses. The Journal of Research in Finance, 3(2), 196-277.
  • Lintner, J. (1956). Distribution of Incomes of Corporations among Dividends, Retained Earnings and Taxes. The American Economic Review, 46(2), 97-113.
  • Malkawi, H. (2008). Factors Influencing Corporate Dividend Decision: Evidence from Jordanian Panel Data. International Journal of Business, 13(2), 177-195. Miller, M. H., & Rock, K. (1985). Dividend Policy Under Asymmetric Information. The Journal of Finance, 40(4), 1031-1051.
  • Mitra, D. and Owers, J. (1995). Dividend Initiation Announcement Effects and the Firm’s Information Environment. Journal of Business Finance and Accounting, 22(4), 551-573.
  • Pettit, R. (1976). The Impact of Dividends and Earnings Announcements: A Reconciliation. The Journal of Business, 49(1), 86-96.
  • Pettit, R. (1972). Dividend Announcements, Security Performance, and Capital Market Efficiency. The Journal of Finance, 27(5), 993-1007.
  • Urooj, S. F., & Zafar, N. (2008). Share Price Reaction to Dividend Announcements. The Business Review, 10(1), 322-329.
  • White, H. (1980). A Heteroscedasticity-consistent Covariance Matrix Estimator and a Direct Test for Heteroscedasticity. Econometrica, 48(4), 149-170.
  • Yilmaz, M. K., & Gulay, G. (2006). Dividend Policies and Price-Volume Reactions to Cash Dividends on the Stock Market: Evidence from the Istanbul Stock Exchange. Emerging Markets, Finance & Trade, 42(4), 19-49.
  • Yilmaz, A. A., & Selcuk, E. A. (2010). Information Content of Dividends: Evidence from Istanbul Stock Exchange. International Business Research, 3(3), 126-132.

FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE

Year 2011, Volume: 19 Issue: 1, 1 - 25, 28.06.2011
https://doi.org/10.29228/mjes.143

Abstract

According the dividend signalling hypothesis, it is expected a positive
relationship between dividend change announcements and the subsequent
share price reactions. However, empirical results are not consensual. This
study investigates whether firm-specific factors contribute to explain a
negative market reaction to dividend change announcements, contributing
to the scarce analysis of firm-specific factors explaining the inverse share
price reaction to dividend change announcements. The study applies the
panel data approach to three European markets. The results show that the
market reaction to dividend change announcements is negatively associated
with the firm size. We find that the negative market reaction to dividend
increase announcements is associated with firms that have, on average,
lower dividend changes and higher growth opportunities. Moreover, the
results suggest that a high percentage of dividend negative changes,
decreases the likelihood that the market reacts positively to a dividend
decrease announcement. Globally, we find some evidence for the dividend
signalling hypothesis.

References

  • Abeyratna, G., & Power, D. M. (2002). The Post-announcement Performance of Dividend-changing Companies: The Dividend-signalling Hypothesis Revisited. Accounting and Finance, 42, 131-151.
  • Aharony, J., & Swary, I. (1980). Quarterly Dividend and Earnings Announcements and Stockholders Returns: An Empirical Analysis. The Journal of Finance, 35(1), 1-12.
  • Ahmad, H. & Javid, A. (2009). Dynamics and Determinants of Dividend Policy in Pakistan: Evidence from Karachi Stock Exchange Non-financial Listed Firms. International Research Journal of Finance and Economics, 25, 148-171.
  • Ali, M. B., & Chowdhury, T. A. (2010). Effect of Dividend on Stock Price in Emerging Stock Market: A Study on the Listed Private Commercial Banks in DSE. International Journal of Economics and Finance, 2(4), 52-64.
  • Amihud, Y. and Li, K. (2002). The Declining Information Content of Dividend Announcements and the Effect of Institutional Holdings. Working Paper, Stern School of Business, New York University.
  • Asamoah, G. N. (2010). The Impact of Dividend Announcement on Share Price Behaviour in Ghana. Journal of Business & Economics Research, 8(4), 47-58. Asquith, P., & Mullins, D. W. (1983). The Impact of Initiating Dividend Payments on Shareholder Wealth. The Journal of Business, 56(1), 77-96.
  • Benartzi, S., Michaely, R., & Thaler, R. (1997). Do Changes in Dividends Signal the Future or the Past?. The Journal of Finance, 52(3), 1007-1034.
  • Benesh, G. A., 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.
  • Bhattacharya, S. (1979). Imperfect Information, Dividend Policy, and ‘The Bird in the Hand Fallacy’. Bell Journal of Economics, 10(1), 259-270.
  • Born, J. A., Moser, J. T., & Officer, D. T. (1988). Changes in Dividend Policy and Subsequent Earnings. Journal of Portfolio Management, 14(4), 56-62.
  • 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 & Accounting, 13(2), 101-124.
  • 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.
  • 18 FIRM-SPECIFIC FACTORS & DIVIDEND CHANGE ANNOUNCEMENTS
  • DeAngelo, H., DeAngelo, L., & Skinner, D. J. (1992). Dividends and Losses. The Journal of Finance, 47(5), 1837-1863.
  • Dhillon, U. S., & Johnson, H. (1994). The Effect of Dividend Changes on Stock and Bond Prices. The Journal of Finance, 49(1), 281-289.
  • Eddy, A., & Seifert, B. (1988). Firm Size and Dividend Announcements. The Journal of Financial Research, 11(4), 295-302.
  • Fu, Y., and Morgan, H. (2008). “Dividend Policy and the Signalling Hypothesis: Is the Signalling Hypothesis Still Alive?”, working paper available at http://www.sfu.ca/~hmorgan/sigallinghypothesis-HM,Yufen-spring2008.pdf.
  • Ghosh, C., & Woolridge, J. R. (1988). An Analysis of Shareholder Reaction to Dividend Cuts and Omissions?. The Journal of Financial Research, 11(4), 281- 294.
  • Grullon, G. M. R., & Swaminathan, B. (2002). Are Dividends Changes a Sign of Firm Maturity?. The Journal of Business, 75(3), 387-424.
  • Hausman, J. A. (1978). Specification Tests in Econometrics. Econometrica, 46(6), 1251-1271.
  • Haw, I., & Kim, W. (1991). Firm Size and Dividend Announcement Effect. Journal of Accounting, Auditing and Finance, 6(3), 325-347.
  • Healy, J., Hathorn, J., & Kirch, D. (1997). Earnings and the Differential Information Content of Initial Dividend Announcements. Accounting Enquiries, 6(2), 187-220.
  • Hussin, B. M., Ahmed, A. D., & Ying, T. C. (2010). Semi-strong Form Efficiency: Market Reaction to Dividend and Earnings Announcements in Malaysian Stock Exchange, The IUP Journal of Applied Finance, 16(5), 36-60.
  • Jensen, M. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeover. American Economic Review, 76(2), 323-329.
  • Jiang, W. & Stark, A. (2011). “Dividends, Accounting Information, and the Valuation of Loss-Making Firms in the UK”, working paper, Available at SSRN: http://ssrn.com/abstract=1734287.
  • John, K., & Williams, J. (1985). Dividends, Dilution, and Taxes: A Signalling Equilibrium. The Journal of Finance, 40(4), 1053-1070.
  • Kaplan, S. N., & Zingales, L., (1997). Do Investment-cash Flow Sensitivities Provide Useful Measures of Financing Constraints?. The Quarterly Journal of Economics, 112(1), 169-215.
  • Lamont, O. A., Polk, C., & Saá-Requejo, J. (2001). Financial Constraints and Stock Returns. The Review of Financial Studies, 14(2), 529-554. MARMARA JOURNAL OF EUROPEAN STUDIES 19
  • Lang, L. H. P., & Litzenberger, R. H. (1989). Dividend Announcements: Cash Flow Signalling Versus Free Cash Flow Hypothesis. Journal of Financial Economics, 24(1), 181-191.
  • Lee, H. W., & Ryan, P. A. (2002). Dividends and Earnings Revisited: Cause or Effect?. American Business Review, 20(1), 117-122.
  • Lee, H. W., & Ryan, P. A. (2000). The Information Content of Dividend Initiations and Omissions: The Free Cash Flow and Dividend Signalling Hypotheses. The Journal of Research in Finance, 3(2), 196-277.
  • Lintner, J. (1956). Distribution of Incomes of Corporations among Dividends, Retained Earnings and Taxes. The American Economic Review, 46(2), 97-113.
  • Malkawi, H. (2008). Factors Influencing Corporate Dividend Decision: Evidence from Jordanian Panel Data. International Journal of Business, 13(2), 177-195. Miller, M. H., & Rock, K. (1985). Dividend Policy Under Asymmetric Information. The Journal of Finance, 40(4), 1031-1051.
  • Mitra, D. and Owers, J. (1995). Dividend Initiation Announcement Effects and the Firm’s Information Environment. Journal of Business Finance and Accounting, 22(4), 551-573.
  • Pettit, R. (1976). The Impact of Dividends and Earnings Announcements: A Reconciliation. The Journal of Business, 49(1), 86-96.
  • Pettit, R. (1972). Dividend Announcements, Security Performance, and Capital Market Efficiency. The Journal of Finance, 27(5), 993-1007.
  • Urooj, S. F., & Zafar, N. (2008). Share Price Reaction to Dividend Announcements. The Business Review, 10(1), 322-329.
  • White, H. (1980). A Heteroscedasticity-consistent Covariance Matrix Estimator and a Direct Test for Heteroscedasticity. Econometrica, 48(4), 149-170.
  • Yilmaz, M. K., & Gulay, G. (2006). Dividend Policies and Price-Volume Reactions to Cash Dividends on the Stock Market: Evidence from the Istanbul Stock Exchange. Emerging Markets, Finance & Trade, 42(4), 19-49.
  • Yilmaz, A. A., & Selcuk, E. A. (2010). Information Content of Dividends: Evidence from Istanbul Stock Exchange. International Business Research, 3(3), 126-132.
There are 40 citations in total.

Details

Primary Language English
Journal Section Makaleler
Authors

Elisabete S. Vieira This is me

Publication Date June 28, 2011
Published in Issue Year 2011 Volume: 19 Issue: 1

Cite

APA Vieira, E. S. (2011). FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE. Marmara Üniversitesi Avrupa Araştırmaları Enstitüsü Avrupa Araştırmaları Dergisi, 19(1), 1-25. https://doi.org/10.29228/mjes.143
AMA Vieira ES. FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE. MJES. June 2011;19(1):1-25. doi:10.29228/mjes.143
Chicago Vieira, Elisabete S. “FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE”. Marmara Üniversitesi Avrupa Araştırmaları Enstitüsü Avrupa Araştırmaları Dergisi 19, no. 1 (June 2011): 1-25. https://doi.org/10.29228/mjes.143.
EndNote Vieira ES (June 1, 2011) FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE. Marmara Üniversitesi Avrupa Araştırmaları Enstitüsü Avrupa Araştırmaları Dergisi 19 1 1–25.
IEEE E. S. Vieira, “FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE”, MJES, vol. 19, no. 1, pp. 1–25, 2011, doi: 10.29228/mjes.143.
ISNAD Vieira, Elisabete S. “FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE”. Marmara Üniversitesi Avrupa Araştırmaları Enstitüsü Avrupa Araştırmaları Dergisi 19/1 (June 2011), 1-25. https://doi.org/10.29228/mjes.143.
JAMA Vieira ES. FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE. MJES. 2011;19:1–25.
MLA Vieira, Elisabete S. “FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE”. Marmara Üniversitesi Avrupa Araştırmaları Enstitüsü Avrupa Araştırmaları Dergisi, vol. 19, no. 1, 2011, pp. 1-25, doi:10.29228/mjes.143.
Vancouver Vieira ES. FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE. MJES. 2011;19(1):1-25.