Stock price reaction to dividend changes: an empirical analysis of the Johannesburg Securities Exchange
Date
2012-05-22
Authors
Lentsoane, Enos
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Abstract
This paper provides an empirical analysis of the stock price behaviour of firms
listed on the Johannesburg Securities Exchange (JSE) around corporate events
relating to final cash dividend change announcements over the period 2004 to
2009. Declared for the financial year-end, final cash dividend announcements
either represent an increase, a reduction or no change relative to the previous
year’s announcement. In this paper we analyse the stock price behaviour of
firms that announced dividend reductions before and during the Global
Financial Crisis of 2007 (GFC 2007). The pre-crisis analysis focuses on
dividend reduction effects on share price during normal economic times and
crisis analysis focuses on effects during economic downturn. We refer to the
pre and during crises effects as firm-specific and systemic effects respectively.
Studies about the general effect of dividend announcements on shareholder
value are well documented; however our study is motivated by the fact that
there has not been an abundance of forthcoming research in South Africa
pertaining to how share prices have reacted to dividend reductions before and
during the GFC 2007. We employ an event study methodology in the context of
this emerging market to assess the share price behaviour to dividend
reductions. Integral to an event study methodology in the corporate context, is
the analysis of abnormal performance around the event date. Abnormal
performance is measured by employing three widely used quantitative
approaches namely, the market-adjusted, market model and the buy-and-hold
abnormal return approaches. Based on daily closing share price information
collected from iNet Bridge database, abnormal performance is calculated from
2004 to 2009 while controlling for the contemporaneous effect of earnings
announcements (earnings data collected from Bloomberg database) occurring
within 10 trading days of dividend announcement. The analysis shows that the
market reaction is not statistically significant on the announcement day and that
more negative returns occur during the pre-crisis period. Volatility of abnormal
returns is higher during the pre-crisis period. The research does not support the
Irrelevance Theory but seems to support the signalling hypothesis.
Description
Keywords
Johannesburg Securities Exchange, Stock prices, Dividends, Global financial crisis, Final cash dividend