The Role of Firm-Specific Variables in Explaining Heterogeneous Stock Market Reactions to Dividend Announcements

Mohib Ullah, Attaullah Shah

Abstract


The finance literature reports mixed results about the stock market reaction to dividend announcements. We try to explore that the heterogeneous stock market reaction to dividend announcements might be attributed to a number of firm-specific financial and non-financial factors. In this vein, we investigate the role of family ownership, firm size, leverage, dividend yield, market-to-book ratio, and firm growth in explaining the stock market reaction to dividend announcements. We use a sample of 206 dividend announcements of 136 firms listed at the Karachi Stock Exchange over the period of 2008 to 2012. Results of both the univariate and multiple regression analysis show that family ownership, firm size, and leverage negatively influence the stock market reaction to dividend announcements while dividend yield positively influences the stock market reaction to dividend announcements. 


Keywords


Dividend announcements, heterogeneous market response, KSE, signalling theories, abnormal returns

Full Text:

PDF

References


Alonso, P. D. A., Iturriaga, F. J. L., & Sanz, J. A. R. (2005). Financial decisions and growth opportunities: a Spanish firm's panel data analysis. Applied Financial Economics, 15 (6), 391-407.

Amihud, Y., & Li,K. (2006). The Declining Information Content of Dividend Announcements and the Effects of Institutional Holdings. The Journal of Financial and Quantitative Analysis, 41(3), 637–60.

Andres, C., Betzer, A., Bongard, I.V.D., Haesner, C., & Theissen, E. (2011). Dividend Announcements Reconsidered: Dividend Changes versus Dividend Surprises. Social Science Research Network, Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1763201.

Ball, R., Kothari, S. P., & Robin, A. (2000). The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics, 29, 1–51.

Baker, H.K., & Powell G.E. (1999). How Corporate Managers View Dividend Policy. Quarterly Journal of Business and Economics, 38(2).

Baker, H.K., Powell, G.E., & Veit E.T. (2002). Revisiting the Dividend Puzzle. Do All of the Pieces Now Fit? Review of Financial Economics, 11, 241- 261.

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 and Management Science, 10, 259-270.

Borokhovich, K.A., Brunarski, K.R., Harman, Y., & Kehr, J. (2005). Dividends, Corporate Monitors and Agency Costs. The Financial Review, 40(1), 37-65.

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.

Dasilas, A., & Leventis, S. (2011). Stock Market Reaction to Dividend Announcements: Evidence from the Greek Stock Market. International Review of Economics and Finance, 20, 302-311.

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.

Gugler, K., & Yurtoglu, B.B. (2003). Corporate Governance and Dividend Pay-Out Policy in Germany. European Economic Review, 47(4), 731–58.

Healy, J., Hathorn, J., & Kirch, D. (1997). Earnings and the Differential Information Content of Initial Dividend Announcements. Accounting Enquiries, 6 (2), 187-220.

Hossain, F., Siddiquee, M., & Rahman, M.I. (2006). Dividend Surprise and Market Reaction: Evidence from Dhaka Stock Exchange (DSE) Ltd. South Asian Journal of Management, 13.

Jensen, M.C., & Meckling, W.H. (1976). Theory of the Firm: Managerial Behavior, Agency costs and Ownership Structure. Journal of Financial Economics,3, 305-360.

Javid, A.Y., & Iqbal, R. (2008). Ownership Concentration, Corporate Governance and Firm Performance: Evidence from Pakistan. The Pakistan Development Review, 47(4), 643-659.

Jensen, M.C.(1986). Agency Costs of Free Cash Flow, Corporate Finance and Takeover. American Economic Review,76, 323-329.

John, K., & Williams, J. (1985). Dividends, Dilution, and Taxes: a Signalling Equilibrium. Journal of Finance, 40, 1053-1070.

Khan, A., Kaleem, A., & Nazir, M.S. (2012). Impact of Financial Leverage on Agency cost of Free Cash Flow: Evidence from the Manufacturing sector of Pakistan. Journal of Basic and Applied Scientific Research, 2(7). 6694-6700.

Lang, H.P., & Litzenberger, R. (1989). Dividend Announcements: Cash Flow Signalling VS Free Cash Flow Hypothesis. Journal of Financial Economics, 24(1), 181-191.

Leland, H., & Pyle, D. (1977). Information Asymmetries, Financial Structure, Financial Intermediation. Journal of Finance, 32, 371-387.

Miller, M.H.,& Modigliani, F.(1961). Dividend Policy, Growth, and the Valuation of Shares. Journal of Business, 34, 411-443.

Nazir, M.S., & Saita, H.K. (2013). Financial Leverage and Agency Cost: An Empirical Evidence of Pakistan. International Journal of Innovative and Applied Finance. 4(4), 106-113.

Miller, M.H., & Rock, K. (1985). Dividend Policy under Asymmetric Information. Journal of Finance,40, 1031-1051.

Ross, S.A. (1977). The Determination of Financial Structure: The Incentive Signalling Approach. Bell Journal of Economics, 8 (1), 23-40.

Satti, Z.W. (2013). Evidence of Agency Theory from the Banking Sector of Pakistan. Retrieved from https://owl.english.purdue.edu/owl/resource/560/01/

Vieira, E.F.S. (2005). Signalling with Dividends? New Evidence from Europe. Instituto Superior de Ciências do Trabalho e da Empresa (ISCTE), PhD Thesis.

Vieira, E.F.S. (2011). Firm-Specific factors and the market reaction to dividend change announcements: Evidence from Europe. Marmara Journal of European Studies, 19(1), 1-25.

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.

Zakaria, Z., Muhammad, J., & Zulkifli, A.H. (2012). The Impact of Dividend Policy on the Share Price Volatility: Malaysian Construction and Material Companies. International Journal of Economics and Management Sciences, 2(5), 1-8.




DOI: http://dx.doi.org/10.22555/pbr.v20i1.315

Refbacks



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

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