Impact of Announcing Dividends on Share Prices of Corporations Listed in the Saudi Stock Exchange 1. Background of the problem The purpose of all efforts to ensure full disclosure of pertinent information concerning listed companies is to enhance the efficiency of the financial markets as a tool for valuation…
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In the past, research tended to confirm the absence of impact of dividend announcements on shareholders’ value on condition that taxes and market imperfections are not present. For this reason, companies would prefer to invest its excess funds (which are not needed for business operations or expansion) in positive net present value projects available to it, in lieu of a dividend payout. It is also generally accepted that market valuation of stocks is dependent upon future earnings – when future earnings are lacklustre, the stock’s market value would go down or remain flat. Should companies pay out all its earnings, therefore, funds that may be reinvested for future productive undertakings are depleted, creating a dampener for new dividend declarations. Also, if dividends were taxable, shareholders may put off the declaration of additional dividends in order for their tax liabilities to be prevented from increasing. Despite these disadvantages to dividend declarations, however, companies continue to resort to cash dividends in order to signal information about future earnings (Uddin & Chowdhury, 2008). What is interesting in Saudi Arabian situation is that Saudi Arabia is a non-tax economy, and one would tend to believe that market imperfections are kept to a minimum. The country therefore presents some interesting possibilities towards confirmation of certain principles espoused by Modigliani and Miller, particularly concerning the signalling theory of dividends. This therefore leads to the objective of the study, stated below. 1.1 Objective of the research study The objective of the study is to determine the impact of dividend announcements on the share prices of corporations that are listed in the Saudi Stock Exchange. The purpose is to determine the degree to which informational content is conveyed by unexpected announcements of dividends, as discerned from the stock price changes beyond levels ordinarily expected. This information would be important to all participants in the stock market, including regulators, policy formulators and investors. 1.2 Statement of the problem The study addresses the problem of how market efficiency may be determined through stock price movements in relation to their corresponding market-moving announcements – that is, the release of announcement of dividends other than that already expected by investors. Knowing how this may be determined, the study shall also apply this method in assessing the efficiency of the Saudi Arabian stock market in factoring in the information content of these announcements. 1.3 Main research question The main research question may be stated thus: How efficiently does the announcement of dividends get factored into the prices of stocks trading in the Saudi Arabian stock market? 1.4 Research subquestions The study proposes to answer the main research question by seeking answers to the following subquestion: Q1: How may extraordinary stock price fluctuations be reliably measured? Q2: By what criteria may unexpected dividend announcements be determined, vis-a-vis expected dividend declarations? Q3: Having distinguished extraordinary stock price fluctuations from regular movements, and unexpected divide
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The capital structure of a firm is the relative proportion of borrowed capital in comparison to equity capital. The importance of investigating the implications of the level of debt in the financing of a firm’s operation is of importance because it has direct impact on the cost of capital of the company and therefore on the company’s bottom line.
The writer reviews some of the dividend theories and related issues along with important other factors that influence the share prices. The issue of dividends is always studied in two parts known as dividend policies and dividend theories. Several people have pronounced different theories on how dividend policies are determined and implanted.
Literature Review 10 2.1 Introduction 10 2.2.Theoretical Background 11 2.2 Some previous tests conducted on the Exchange Markets 12 Reference 15 1. Proposal 1.1 Title of the project Impact of Announcing Dividends on Shares Prices of Corporations Listed in the Dubai Financial Market.
DECLARATION I, Leonard Mwango Chungulo, do declare that this work is my own and that the work of other persons utilized in this dissertation has been duly acknowledged. This work presented here has not been previously presented at this or any other university for similar purposes.
The real estate crisis that started in the US turned in a global economic recession around all corners of the globe leading to a plunge towards global financial meltdown. The strong and emerging economies of the world were in turmoil of liquidity crisis. There were some economies which were, however, resilient to the shock of the global economic crisis.
The recent global financial crisis have brought to the fore issues and weaknesses in the international market for investments and securities, drawing concern to the financial health and operational continuity of potential equity investments. These concerns are exacerbated by the lack of transparency in the manner corporations operate, further undermining efforts to establish an international financial accounting standard and norms for the conduct of ethical business.
Basically, if the ADF statistic exceeds the critical value in each of the tests, then the null hypothesis of the unit root cannot be accepted. On the other hand, if the test statistic does not exceed the critical value, then the null hypothesis is accepted and the series is then said to be non-stationary (Dickey and Fuller, 1981).
This is pursuant to the Modigliani-Miller theory that a firm may seek to maximize profitability by resorting to a higher level of debt financing in order to take advantage of the tax deductibility of interest expenses in relation to this debt. The study gathered data from audited financial statements of ten manufacturing companies operating in Saudi Arabia and publicly listed in the exchange.
4 Pages(1000 words)Dissertation
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