Impact of Dividend Announcement on Shareholder Value
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Different studies suggest that dividend payment has no impact on share holder value in the absence of taxes and market imperfection. Whenever companies have surplus earning, they should invest it in projects having positive net present value. Another approach is that, the stock value depends upon expected future dividend of that stock. So companies must try to reflect a sustainable growth while announcing dividends. This study is to examine the impact of dividend announcement on shareholder value. This study is based on 17 dividend paying companies, listed on Karachi Stock Exchange. The result shows that investors did not gain from dividend announcement, but lost some value over a period of 30 days prior to dividend announcement through 20 days after ex-dividend date. Results of study is supporting the dividend irreverence hypothesis, that there is no benefit of shareholder in announcement of dividend.
Literature Review:
The ultimate objective of any corporate entity is to maximize the shareholder value. For the accomplishment of this objective, Finance managers take three kinds of important decisions. First two decisions are investment and financing decisions and the third one is regarding dividend payment to shareholders. Now the question is that whether the payment of dividend increases shareholder value or not. As dividend mean reward that shareholders already own in a corporation, so it is adjusted by decline in stock value (Porterfield 1959 and 1965). Generally shareholders prefer capital gain over cash dividend and the reason is tax pattern. Normally dividend is taxed at high rate as compared to the capital gain. So if we neglect the assumption of tax and other restrictions, then dividend announcement has no impact on shareholders' value (Miller and Modigliani, 1961).
Investors value a dollar of expected dividend more highly than a dollar of expected capital gain because the dividend yield component is less risky as compared to growth component. (Gorden 1963) If a firm pay the whole part of its earning as dividend then it is most possible that there will be shortage of funds for investment which may cause decrease in dividend in the future. Another related approach is that dividend announcement effect the market price of stocks because it carries the information of future cash flow of firm (Bhattacharya 1979, Baryosef and Huffman 1986).
Shareholders have no benefit in the announcement of dividend. As the shares value falls from thirty days before announcement of dividend to thirty days after dividend announcement. But these losses are partially compensated by dividend yield in long run (Hamid Uddin, 2003). In some countries like Pakistan, companies are ranked on the basis of dividend payout and some rules by SECP also forced the companies to pay dividend. Considering the benefits of capital gain over cash dividend this is not a better approach at all (Dr. Ahmad Kaleem & Chaudhary Salahuddin).
The whole literature review is based on two ideologies. One is that the dividend announcement has a positive relationship with stock prices (Gordon 1963) and the second is that the dividend announcement has a negative relationship with stock prices (Bhattacharya 1979, Baryosef, Huffman 1986 and Hamid Uddin, 2003). The positive relationship between stock prices and dividend announcement is due to dividend information effect, while the negative relationship is because of tax effect.
Introduction:
Whenever a company generates profit, it either goes for reinvestment or pay dividend. If a company is going to pay dividend then it takes decision of whether to pay cash dividend or to buy back some of the existing stocks. The question is if a company has opportunity of investment in a project having positive net present value then why should company go for dividend? According to Irrelevance Theory by Merton Miller and Franco Modigliani (MM) a firm's dividend policy has no effect on shareholder value and cost of capital of that firm. The most important thing is the earning of a company nor the dividend policy or reinvestment plans. Assuming there are no taxes and brokerage costs. According to Porterfield (1959 and 1965) paying cash dividend means giving rewards to shareholders that is something they already own in a company. Hence this will offset by declining in the stock value. So paying dividend is not a good approach at all. According to Gorden (1963) investors prefer a dollar of present more than that of expected future one. That's why companies should go for dividend instead of capital gain.
All the theories regarding payment of cash dividend have their own approaches and directions. So the issue of whether paying cash dividend has any impact on shareholder value or not is still unresolved. In countries where dividend income is highly taxable as compared to capital gain, investors prefer capital gain over cash dividend. There is another face of picture, in countries like Pakistan where companies are ranked according to rate of dividend paid by them, companies normally prefer to pay cash dividend.
In this study we have examined the effect of dividend announcement on shareholders' value. To do so, we have selected 17 dividend paying companies from eight different sectors and use the methodology of Market Adjusted Abnormal Return (MAAR) and Cumulative Abnormal Return (CAR).
Methodology:
To study the impact of dividend announcement on shareholder value, two measurement have been used. (i) Market Adjusted Abnormal Return (MAAR). (ii) Cumulative Abnormal Return (CAR). MAAR indicates the relative daily percentage price change in the dividend paying stocks compared to the change in average market price. We use KSE 100 price index as proxy of average market price. MAAR is calculated as follows.
MAARit = Rit-Rmt
MAARit it is the market adjusted abnormal return for security i over time t.
Rit is the time t return on secutiry I, calculated as (Pit – Pit-1)/Pit-1. Where, Pit is the market closing price of stock I on day t. Pit is the market closing price of stock I on day t-1.
Rmt is the time t return on the KSE-100 price index calculated as (It-It-1)/It-1. Where. Iit is the market index on day t. It-1 is the market index on day t-1.
The market adjusted abnormal return (MAAR) shows the change in individual stock's value due to the dividend announcement. As the percentage change in market index is deducted, the remainder gives us the portion of the value change, which is specific to that particular stock resulting from its dividend announcement. MAAR is calculated over a period starting to – 30 days to +20 days relative to the dividend announcement day (O-day).
The second measure used is cumulative abnormal return (CAR), which measures the investor total return over a period starting from before the announcement of dividend to after the dividend announcement day. We use a 51 day window period starting from -30 day to + 20 day relative to the dividend announcement day (O-day). CAR is computed as follows.
CARit = ∑MAARit CARt = ∑CARit
Where CARit is cumulative abnormal return for security I and CARit is cumulative abnormal return for all securities. Similarly MAAR it is market adjusted abnormal return for security I for window period. After that all, the t-test suggested in Brown and Warner (1990, p251-252) is applied to test the significance of CARit and CARt.
Sample Description:
The sample includes 17 companies, from eight different sectors. All these companies are registered on Karachi Stock Exchange (KSE) and announced dividend between January 2009 and December 2009. Five companies are from banking sector, three from oil and gas, three from cement, two from chemical, one from Pharmaceutical, one from auto assembler, one from textile and again one from telecom sector. Table 1 is showing the names of companies with percentage of dividend announced by them in respective year.
Empirical findings and analysis
Market Adjusted Abnormal Return
MAAR shows the change in individual stock's value due to the dividend announcement. As the percentage change in market index is deducted, the remainder gives us the portion of the value change, which is specific to that particular stock resulting from its dividend announcement. In this study, MAAR is calculated over a period starting to – 30 days to +20 days relative to the dividend announcement day on zero days.
Cumulative Abnormal Return
CAR which measures the investor total return over a period starting from before the announcement of dividend to after the dividend announcement day.
Table 1
Sample Companies
Sr. No
Company Name
Sector
1
Habib Bank Limited
Banking
2
Allied Bank Limited
Banking
3
National Bank of Pakistan
Banking
4
United Bank Limited
Banking
5
Bank AlFalah Limited
Banking
6
OGDCL
Oil and Gas
7
National Refinery Limited
Oil and Gas
8
Pakistan State Oil
Oil and Gas
9
Lucky Cement
Cement
10
DG Cement
Cement
11
Attock Cement
Cement
12
ICI Pakistan ltd.
Chemical
13
Engro Chemical Ltd
Chemical
14
Highnoon Labortories ltd.
Pharmaceutical
15
Indus Motor Company ltd.
Auto Assembler
16
Nishat Mill ltd.
Textile
17
Pakistan Telecom Co.
Telecom
Table 2
Dividend paid by different sectors in 2009 (Dividend in %age)
Sector
No of Companies
Maximum Dividend
Minimum Dividend
Average Dividend
Banking
5
66
25
28.5
Oil and Gas
3
125
25
67
Cement
3
40
Chemical
2
65
60
62.5
Pharmaceutical
1
25
25
25
Auto Assembler
1
100
100
100
Textile
1
20
20
20
Telecom
1
15
15
15
Table 3
Average MAAR for 51 days
Days relative to Dividend Announcement
Average MAAR
-30
0.006995623
-29
-0.000286981
-28
0.005946367
-27
0.005136643
-26
0.005144653
-25
-0.004782532
-24
-0.005356564
-23
-0.002944433
-22
-0.01411987
-20
0.004907264
-19
0.00128167
-18
-0.00011111
-17
-0.001020032
-16
0.001673402
-15
0.000430173
-14
0.002846477
-13
-0.001693558
-12
0.002657397
-11
-0.016735807
-10
-0.013092062
-9
-0.005113378
-8
-0.000797798
-7
-0.015879282
-6
-0.005853397
-5
-0.006602591
-4
-0.010009299
-3
-0.002897751
-2
-0.009621279
-1
0.00260226
0
-0.007908932
1
0.005621832
2
-0.011260743
3
-0.001171285
4
-0.003236167
5
0.000455198
6
0.002713615
7
-0.002483024
8
0.006107779
9
-0.005986564
10
-0.006719537
11
-0.003661463
12
-0.00255736
13
0.001298415
14
-0.003020666
15
-0.013184736
16
-0.001647796
17
-0.000315768
18
0.006733917
19
-0.009766422
20
-0.000404328
Table 4
Cumulative Abnormal Return
Company Name
CARit
Habib Bank Limited
0.007539
Allied Bank Limited
-0.23825
National Bank of Pakistan
-0.13679
United Bank Limited
-0.56202
Bank AlFalah Limited
-0.46642
OGDCL
0.077864
National Refinery Limited
-0.17524
Pakistan State Oil
0.368848
Lucky Cement
-0.14289
DG Cement
-0.08247
Attock Cement
-0.2001
ICI Pakistan ltd.
0.04316
Engro Chemical Ltd
-0.32989
Highnoon Labortories ltd.
0.02233
Indus Motor Company ltd.
-0.31301
Nishat Mill ltd.
0.09022
Pakistan Telecom Co.
-0.13362
CARt
-2.17073
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