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Article
Publication date: 1 March 2006

Abeyratna Gunasekarage and David M. Power

This paper seeks to examine the long‐run financial and return performance of UK companies which are grouped according to whether or not they have changed their dividends…

Abstract

Purpose

This paper seeks to examine the long‐run financial and return performance of UK companies which are grouped according to whether or not they have changed their dividends and earnings. Prior research has been conducted using US data and they are limited to extreme dividend changes such as dividend initiations and omissions. They have also arrived at contradicting results; some report a drift in performance, while others document evidence of mean reversion in performance. The current paper hopes to resolve this conflict using data for a large sample of UK firms which disclosed more general changes in dividends and earnings.

Design/methodology/approach

The aims of the paper are addressed using a stock market‐based study of share price performance and a detailed analysis of company performance based on financial ratios. These analyses are conducted from five years before to five years after the announcement of dividend/earnings news.

Findings

At the time of the announcements, share returns tend to be positive (negative) where companies have increased (decreased) the dividend and earnings. There is also evidence to suggest that the stock market has anticipated some of this news in the preceding 12 months. However, the dividend/earnings news does not appear to act as a signal of long‐term future company performance; companies which cut this dividend and reported lower earnings achieved the largest excess returns over the next five years. A similar mean‐revealing pattern existed in the financial ratios. Finally, most of the future long‐term share performance was attributable to the earnings rather than to the dividend news.

Research limitations/implications

The main implication of this research is that current dividend/earnings news is not a good guide to future company performance. Indeed, it is these firms which cut their dividends along with reporting a reduction of earnings which achieve excellent results over a subsequent five‐year period. Of course, there are a number of limitations with the research; it draws on data from two previous studies, looks only at the UK and does not consider sophisticated models of investors' expectations with regard to dividend and earnings information.

Originality/value

The main contribution of this paper is the long‐run analysis of UK company performance following joint dividend‐earnings announcements. The analysis is comprehensive in that it considers both stock market performance as well as financial ratio performance for a period of up to five years following the dividend‐earnings news. Thus, it should be of interest to most UK investors as well as to financial managers with large quoted firms. Academics will also be interested in the results since they shed some light on an existing debate in the literature.

Details

Managerial Finance, vol. 32 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 March 1996

A.A. Lonie, G. Abeyratna, D.M. Power and C.D. Sinclair

Investigates the stock market response to interactive dividend and earnings announcements by a sample of 620 UK companies over the period January to June 1991. First…

Abstract

Investigates the stock market response to interactive dividend and earnings announcements by a sample of 620 UK companies over the period January to June 1991. First, examines the possibility that the response to a dividend announcement may be influenced by whether the dividend is being increased, decreased or left unchanged. US studies suggest that this may indeed be the case and acknowledge the role of the dividend as a signal to investors; dividend increases tend to be associated with positive abnormal returns, and dividend decreases tend to be associated with negative abnormal returns around the time of the dividend announcement. Second, recognizes that identifying a unique dividend information announcement effect is particularly difficult in the UK because UK dividends are almost invariably announced simultaneously with information about corporate earnings. Addresses this problem by focusing on those occasions when the signals associated with these announcements conflict with one another ‐ where dividends are increased and earnings decrease or vice versa. The influence of combinations of dividend and earnings news is found to be important in explaining the share price reaction on the announcement day.

Details

Journal of Economic Studies, vol. 23 no. 1
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 1 March 2006

Alison Fox, John R Grinyer and Alex Russell

This paper examines the lobbying behaviour of UK managers who commented on Accounting Standard Board proposals to re‐introduce full provision deferred taxation accounting…

Abstract

This paper examines the lobbying behaviour of UK managers who commented on Accounting Standard Board proposals to re‐introduce full provision deferred taxation accounting. Although there were no direct cash‐flow implications associated with these proposals, they had the potential to affect a company’s reported net income and revenue reserves. Using published comments and financial statements data, the paper tests: (a) the conventional positive accounting theory gearing hypothesis, using debt/equity ratios and (b) a new dividend hypothesis that is presented in the paper. The findings did not provide support for the gearing hypothesis and are therefore consistent with recent work of various other authors. However, the new dividend hypothesis was supported and the paper therefore suggests that the potential impact that an accounting treatment has on the revenue reserves of a company, and thus its dividend paying capacity, is a plausible reason for observed lobbying behaviour in the UK.

Details

Journal of Applied Accounting Research, vol. 8 no. 1
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 18 October 2011

Elisabete Simões Vieira

The purpose of this paper is to examine the effect of investor sentiment (ISENT) on the market reaction to dividend change announcements.

Abstract

Purpose

The purpose of this paper is to examine the effect of investor sentiment (ISENT) on the market reaction to dividend change announcements.

Design/methodology/approach

The author used the European Economic Sentiment Indicator data, from Directorate General for Economic and Financial Affairs, as a proxy for ISENT and focus on the market reaction to dividend change announcements, using panel data methodology.

Findings

Using data from three European markets, the results indicate that ISENT has some influence on the market reaction to dividend change announcements, for two of the three analysed markets. Globally, no evidence was found of ISENT influencing the market reaction to dividend change announcements for the Portuguese market. However, evidence was found that the positive share price reaction to dividend increases enlarges with sentiment, in the case of the UK markets, whereas the negative share price reaction to dividend decreases reduces with sentiment, in the French market.

Research limitations/implications

The author had no access to dividend forecasts, so, the findings are based on naïve dividend changes and not unexpected change dividends.

Originality/value

This paper offers some insights on the effect of ISENT on the market reaction to firms' news, a strand of finance that is scarcely developed and contributes to the analysis of European markets that are in need of research. To the best of the author's knowledge, this is the first study to analyse the effect of ISENT on the market reaction to dividend news, in the context of European markets.

Details

Managerial Finance, vol. 37 no. 12
Type: Research Article
ISSN: 0307-4358

Keywords

Content available
Article
Publication date: 26 February 2018

Ali Murad Syed and Ishtiaq Ahmad Bajwa

This study aims to find the response by stock market against the announcements of quarterly earnings is empirically tested by exploiting event study methodology. Efficient…

Abstract

Purpose

This study aims to find the response by stock market against the announcements of quarterly earnings is empirically tested by exploiting event study methodology. Efficient market hypothesis (EMH) on Saudi stock exchange is also tried on.

Design/methodology/approach

The market model is applied to help gauge the expected returns and to illustrate abnormal returns around the event date.

Findings

The results established that Saudi Stock Market does not bear semi-strong form of EMH. How efficient is the Saudi market is also reflected through evidence of significant abnormal returns and post-earnings announcement drift around earning announcements dates.

Research limitations/implications

The authors have not used analysts’ forecast as the expected earnings which are the limitation. As mentioned earlier, the authors used the quarterly earnings of the previous year as a proxy and that proxy could have been replaced by analysts’ forecast. Another limitation is that the trading volume in the event window is not considered.

Practical implications

The behavior of Saudi capital market is of much concern, and the study of this with a perspective of EMH is the significance of this paper.

Social implications

All stakeholders closely watch earnings announcements and its share price movement around the announcement date. Recently, Saudi Arabia has opened its doors to foreign investors, and big foreign investors are going to enter into Saudi capital market, and after their entry, the behavior of market could be different. In the authors’ opinion, this is the right time to study the efficiency of Saudi market before the entry of foreign investors.

Originality/value

This study is based on the gap created by EMH of Saudi market using event methodology, observed in the existing literature, and it will be a contribution to literature.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 11 no. 3
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 31 July 2009

Umed Temurshoev

The purpose of this paper is to solve the problem of overestimation of industry profits due to the presence of cross‐shareholding (CS) links among firms that is inherent…

Abstract

Purpose

The purpose of this paper is to solve the problem of overestimation of industry profits due to the presence of cross‐shareholding (CS) links among firms that is inherent to the profit formulations in existing literature.

Design/methodology/approach

In proposing a new profits specification, we explicitly distinguish between firms' profits (retained earnings) and their external shareholders' returns. Matrix algebra is used to take into full account both direct and indirect financial interests of firms in each other.

Findings

Compared to no the CS case, with CS firms' industry‐wide retained earnings increase, while aggregate external shareholders' returns decrease unless dividend ratios are all unity. It is shown that qualitatively there is no difference in the outcomes of all profit specifications, whereas there is a quantitative difference.

Research limitations/implications

The pattern of CS is taken as exogenous, which looks at the problem from an antitrust perspective. Endogenizing the structure of CS is left for future research.

Practical implications

Firms have incentives to engage in CS links, since they can only benefit from it. In empirical research (e.g. analyzing market performance) dividend payments have to be taken into account if there are extensive CS links present in the industry under study.

Originality/value

This paper extends the existing profit formulations by including both income inflows and outflows of firms due to CS links. Furthermore, the significance of considering dividend payments for empirical research is discussed.

Details

Journal of Economic Studies, vol. 36 no. 3
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 14 May 2018

Razaz Felimban, Christos Floros and Ann-Ngoc Nguyen

The purpose of this paper is to investigate the stock market response to dividend announcements in high growth emerging markets of Gulf countries.

Abstract

Purpose

The purpose of this paper is to investigate the stock market response to dividend announcements in high growth emerging markets of Gulf countries.

Design/methodology/approach

The sample includes 1,092 dividend announcements from 299 listed firms over the period 2010-2015.

Findings

In the environment where there is an absence of capital gain and income tax, the authors find some evidence for the stock price reaction that partly supports the signaling hypothesis. The findings show that the Gulf Cooperation Council (GCC) market is inefficient because of the leakage information before the announcement in bad news, and the delay of share price adjustment in good news. In addition, the authors report significant trading volume (TV) reaction in all the three announcements clusters, where dividends increase, decrease, and are constant, lending support to the hypothesis that the dividend change announcements have an impact on the TV response due to different investors’ preferences.

Originality/value

This is the first empirical paper on market reaction in share price and TV around dividend announcement using data for the majority of GCC countries.

Details

Journal of Economic Studies, vol. 45 no. 2
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 15 March 2019

Friday Kennedy Ozo and Thankom Gopinath Arun

Very little is known about the effect of dividend announcements on stock prices in Nigeria, despite the country’s unique institutional environment. The purpose of this…

Abstract

Purpose

Very little is known about the effect of dividend announcements on stock prices in Nigeria, despite the country’s unique institutional environment. The purpose of this paper is, therefore, to provide empirical evidence on this issue by investigating the stock price reaction to cash dividends by companies listed on the Nigerian Stock Exchange.

Design/methodology/approach

Standard event study methodology, using the market model, is employed to determine the abnormal returns surrounding the cash dividend announcement date. Abnormal returns are also calculated employing the market-adjusted return model as a robustness check and to test the sensitivity of the results to β estimation. The authors also examine the interaction between cash dividends and earnings by estimating a regression model where announcement abnormal returns are a function of both dividend changes and earnings changes relative to stock price.

Findings

The study find support for the signaling hypothesis: dividend increases are associated with positive stock price reaction, while dividend decreases are associated with negative stock price reaction. Companies that do not change their dividends experience insignificant positive abnormal returns. The results also suggest that both dividends and earnings are informative, but dividends contain information beyond that contained in earnings.

Research limitations/implications

The sample for the study includes only cash dividend announcements occurring without other corporate events (such as interim dividends, stock splits, stock dividends, and mergers and acquisitions) during the event study period. The small firm-year observations may limit the validity of generalizations from these conclusions.

Practical implications

The findings are useful to researchers, practitioners and investors interested in companies listed on the Nigerian stock market for their proper strategic decision making. In particular, the results can be used to encourage transparency and good governance practices in the Nigerian stock market.

Originality/value

This paper adds to the very limited research on the stock market reaction to cash dividend announcements in Nigeria; it is the first of its kind employing a unique cash dividends data.

Details

Managerial Finance, vol. 45 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 9 November 2015

Friday Kennedy Ozo, Thankom Gopinath Arun, Philip Kostov and Godfrey Chidozie Uzonwanne

The purpose of this paper is to provide an additional insight into the dividend puzzle by investigating the field practice of dividend policy in an emerging market such as…

Abstract

Purpose

The purpose of this paper is to provide an additional insight into the dividend puzzle by investigating the field practice of dividend policy in an emerging market such as Nigeria. It also aims to contribute to the literature on industry-related dividend effect by examining whether managerial views on dividend policy vary between financial and non-financial firms.

Design/methodology/approach

The study employs semi-structured interviews with the financial managers of 21 Nigerian listed firms. The interviewees were divided into two broad groups of financial vs non-financial firms based on the industry classification of the firms.

Findings

The findings suggest that, despite differences in institutional environment, the dividend-setting process in Nigerian companies is similar in many extents to those in the USA and other developed markets. Nigerian companies exhibit dividend conservatism and typically focus on current earnings, stability of earnings and availability of cash when determining their current dividend levels. However, unlike in prior studies, the interviewees suggest that their companies do not have a target payout ratio; instead, they target the dividend per share when determining the disbursement level. Nevertheless, views regarding these issues vary significantly between financial and non-financial firms.

Originality/value

This paper adds to the extant literature that has examined the behavioural aspects of dividend policy using interviews, especially in the context of less-developed markets such as Nigeria. The study also updates and extends prior evidence on an industry-related effect on managerial perceptions of dividend policy.

Details

Managerial Finance, vol. 41 no. 11
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 22 February 2013

Naimat Khan, Bruce Burton and David Power

The purpose of this paper is to investigate the views of company executives and investors regarding the signalling impact of dividends in Pakistan. Quantitative research…

Abstract

Purpose

The purpose of this paper is to investigate the views of company executives and investors regarding the signalling impact of dividends in Pakistan. Quantitative research in the area has been scant, but recent large sample evidence suggests a number of noteworthy idiosyncrasies exist in terms of the market reaction and these require further analysis.

Design/methodology/approach

The study involves interviews with 16 financial analysts and 23 company officials regarding the impact of dividends on share prices in Pakistan. Recent work in the nation suggests that the market reaction to dividends in Pakistan is characterised by pre‐announcement leakage and interaction with the attendant earnings signal – these issues were thus central to the discussions.

Findings

The results suggest that individual perceptions both support and contradict the earlier quantitative findings in specific ways. The interviewees, particularly the company executives, were sceptical about the scope for information leakage to occur in Pakistan. In contrast, the interaction between earnings and dividend numbers was acknowledged, with – as in the earlier quantitative studies – the former figure dominating.

Originality/value

This is the first detailed study of perspectives about the impact of dividends on share prices in Pakistan; for reasons outlined above, this represents a major gap in the literature regarding firm‐market communication. The work follows the publication of the first large‐sample study of share price movements in Pakistan; it thereby allows a pervasive conclusion to be drawn about the over‐riding importance of earnings figures in the nation's markets and in the attitudes of the firms listed on them. The study demonstrates the importance of mixed methods research in a developing market context.

Details

Journal of Accounting in Emerging Economies, vol. 3 no. 1
Type: Research Article
ISSN: 2042-1168

Keywords

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