The Impact of Dividend Announcements on Share Prices: A Test of Semi-Strong form of Market Effiency

Abstract

This research endeavors to uncover the relationship of the dividend announcements and stock prices and also facilitates the investors to capitalize on the dividend announcement influences in order to maximize the returns on investments. In real world numerous variants affect the stock market but all of them have been set constant and the only variable, dividend announcement is used for analysis. The sample includes KSE-100 Index companies traded in the market. Out of these hundred companies, only 79 companies are selected because these companies have paid out the dividend in the specified 3 years. The data includes 193 dividend announcement dates of individual stocks and prices of those stocks on daily basis. Market model is applied on the compiled data to calculate actual, expected and abnormal returns. T-test is then applied on the average of abnormal returns of 193 individual stocks to test the level o f significance of results. Moreover, abnormal returns are also cumulated to observe the trend of abnormal returns. The entire research work crystallized to establish a definitive relationship between dividend announcement and stock prices. Moreover, this research also helps to arrive at a decision of buying and selling the stocks at the right time, and define the specific time span of retaining the stocks before and after announcement date.