Impact of Announcing Dividends on Shares Prices of Corporation - Dissertation Example

?Impact of Announcing Dividends on Shares Prices of Corporations Listed in the Dubai Financial Market Table of Contents Proposal 3 3 1 of the project 3 1.2Name and role of the researcher 3 1.3Summary 3 1.4Problem statement 5 1.5Aims and objectives 6 1.6Rationale and justification 7 1.7Research methods 7 1.8Hypotheses and Methods of analysis 8 1.9Dissertation Structure 8 1.10Timescale/plan 9 2. 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. 1.2 Name and role of the researcher 1.3 Summary With the development of trade and business, the face of the financial markets has changed completely. Regulatory authorities of different countries have realized the increasing importance of business for economic developments. In this process, they strive to encourage the business environment through various means. In order to encourage industrialization within a country, a huge amount of investments is required. However, it is not always possible for the government to provide the entire capital for developing growth oriented economic structure. In this process, multiple financial markets play a very crucial role in shaping an economy. The primary objective of financial markets is to avail necessary capital for industrial development from different sources. Therefore, financial markets act a mediator that transforms the ideal and potential capital for productive purposes. Besley and Brigham have explained that the financial market helps to “facilitate flow of fund” from different sources, and in case of developed countries, “financial markets help efficiently allocate excess funds of savers to individuals and organisation in need of funds for investment or consumption” (Besley and Brigham, 2007, p.89). The funds are obtained from the multiple sources like individual, institutions, governments etc. These fund providers are known as investors and they invest their money with an expectation of a better return. The financial markets includes a number sectors like money market, capital market, banks, insurance, mutual funds etc and all of these financial sectors offer necessary funds to the business organisations. Among these, the financial market is the most prominent in terms of generating funds for public listed companies. The capital market helps to raise long term funds from different retail or institutional investors and the entire mechanism is technically processed though the stock exchanges. The capital markets deal in two sub markets i.e. stock market and bond market (CBL Economic Review, 2009). The investments transaction process between the investors and companies are done by the stock exchange and the stock prices are generally determined automatically based on the prevailing demand and supply. However, the stock prices remain for short run as demand and supply of stock is uncertain and tends to change every now and then (Gray, Cusatis and Woolridge, 2003, p.31). However, there are also other factors that influence the demand and supply of a stock. Basically, multiple internal factors like company performance, dividend, competition etc and external factors like inflation, market structure, economic cycle etc are responsible for influencing demand and supply (Khan and Zuberi, 1999, p.47). This research paper will attempt to analyse the role of dividend announcement influencing a stock price while focusing on the companies listed in the Dubai Financial market. Dividend is one of the internal factors that influence stock prices. In fact, when the managements of public listed companies announce the issue of dividends, the stock prices are influenced and there are other changes which can also be traced in relation to the stock. Dividend is “any distribution made by a company to its shareholders whether in money or other property” (CCH Editors, 2009, p.119). Primarily, dividends are offered from the retained earnings company. In order to meet the primary aims of this research paper, answers of some relevant questions will be obtained through research and analysis. These questions are given below. 1. Does the profitability level of company influence dividend and stock’s market price? 2. Does the trade volume of the stock influence dividend and stock’s market price? 3. How does the announcement of dividend issue influence stock price? And what is the relationship between them? In order to obtain the answers to the above framed questions, the stock prices listed in Dubai Financial Market (DFM) will be analysed. UAE is one of the major countries of Middle East and its government is taking necessary steps to develop its capital market. The trade and business activities in UAE are increasing significantly while DFM is an emerging stock exchange and plays a very important role in economic developments. Due its viability, many investors are investing in equities through this stock exchange. Nearly 78 companies are listed in this stock exchange and it started stock trading from March 07, 2007 (Dubai Financial Market-a, 2011). The stock prices of these listed companies will be used for this research paper and research will be conducted by using historical stock prices and historical dividend announcements by these companies. 1.4 Problem statement Financial strategic management is a crucial area for an organisation as it includes important financial activities like planning, risk management, fund generation, dividend policy etc. As this paper deals with dividend and its impact on the stock price, main focus will be on dividend policy. In a perfect capital market, dividend accouchement and dividend issues bring many changes. Therefore, the financial decision makers must consider the probable outcome of the offered dividends. Sometimes, unwise dividend policy may cause agency problem between the shareholders and management. Hence, dividend policy remains a critical area for any publicly listed company. This paper will investigate the multiple factors associated with dividend policy that influence stock price and its demand in market. 1.5 Aims and objectives In order to achieve the overall primary goal of this research paper, a set of smart objectives will be helpful. The overall goal of this paper is to demonstrate the relationship between the dividend announcements and stock price. In this course, there are certain other factors like earning per share, trading volume of shares which are influenced by dividend announcement and ultimately, it affects the demand and supply of stock. Considering these factors, some relevant aims and objectives of this research paper have been formulated which are given below. 1. Demonstrate the influence of dividend announcement on trading volume of stock from the date of announcement till dividend issues. 2. Demonstrate the influence of dividend announcements on the earning per share of stock and cash dividend in the companies listed in DFM. 3. Demonstrate the relationship between the retained earnings of a company and dividend announcements and effect of cash dividend announcement on the overall return on the shareholders. 1.6 Rationale and justification Dubai Financial Market is an emerging stock exchange of UAE. UAE’s economy is mainly dependent on oil and gas exploration and oil export. However, the UAE government has realized that reserved oil and gas is exhaustible. Therefore, currently, the UAE government is trying to boost industrialisation in the country. In this process, capital market is instrumental for encouraging industrialisation by offering necessary fund flow and DFM strives to meet this aim of the UAE government. DFM started trading from March 2007 and since its inception, this stock exchange has been experiencing ups and downs. Initially, the market index of DFM was quite high during 2007-2008. However, due to the financial crisis of 2008, the market index and total value of DFM was hurt significantly (Dubai Financial Market-d, 2011). As a result, overall value of investors as well as of companies was affected drastically. This paper will attempt to identify the overall features of DFM and how the entire market reacts in UAE, after announcement of dividend. 1.7 Research methods This research paper includes a primary goal and a number of the aims and objectives and these must be achieved at the end of the research. In this course, an extensive research analysis will be required and the accuracy and relevancy of the outcome of a research mainly depends on the research method of design. As per the topic of this paper, secondary data analysis with statistical approach will be viable. The historical stock prices and cash dividends of 38 companies listed in DFM will be obtained to demonstrate the relationship between the dividend announcements and stock prices. Moreover, historical financial information like statements, stock ratios of DFM listed companies will be obtained though their annual reports and other financial websites. 1.8 Hypotheses and Methods of analysis In order to proceed with this research paper, the hypotheses for this research have been given below. 1. There has been an increase in the trading volume of the stock and its prices after the date of cash dividend announcements as dividend announcements and stock’s demand and supply are closely related with each other at a significant level of 5%. 2. The dividends announcements increase the earning per share of stock and increase the returns of shareholders as there is a relationship between cash dividend announcements and return on stock at a significant level of 5%. The above stated hypotheses will be examined using statistical tools like simple bi-variate regression model. A bi-variate regression model is based on two variables i.e. independent and dependent. In this paper, the independent will be the dividend announcement date and dependent variable will be factors like return on share, trading and price volume etc. The last five days average closing prices of stock will be calculated before dividend announcements date, on dividend issues date and after the dividend issues. The value and volume of trading stocks will also be obtained for those three events. 1.9 Dissertation Structure Abstract or Executive Summary Chapter 1 1.1 Introduction 1.2 Research Methodology Chapter 2: Literature Review 2.1. Brief Introduction about Dubai Financial Market and Stock Exchange 2.2. Theoretical Background 2.2. Major factors and consequences of dividend announcements 2.3. Analyses of previous research works Chapter 3: Results and Findings Chapter 4: Analysis and Discussion Chapter 5 5.1. Conclusion 5.2. Recommendation List of References List of Appendices 1.10 Timescale/plan The timescale of this research has been shown below using a Gantt chart. All the tasks of this research paper are expected to be complete by the end of September. Tasks to be Completed June July August September Review of previous research papers and literature review writing         Data collection and calculation         Preparation of final and complete draft of research         Submission of final and complete draft         2. Literature Review 2.1 Introduction Capital market has been an interesting area of research as finance and economics are its core essence. Moreover, it also has great economic importance for developing a strong financial economy. Capital markets include stock exchanges which can be explained as an agent or inter-mediatory, playing a very important role in transforming the ideal and unused funds into the productive one. Fund is often known as life-blood for a business as it enables the process of production and commercialisation. In the course of business actions, funds are necessary for multiple purposes and accumulating these funds from various sources is a difficult task for business enterprises. In this process, the stock exchanges make the fund raising process very flexible and transparent. Stock markets are responsible for maintaining the interest of its listed companies as well as the investors including institutions and individual. Shah has defined the stock markets as a “convenient platform useful to buyers and seller of securities” (Shah, 2005, p.44). Here, the buyers are investors and sellers are companies. In recent years, there have been major improvements in stock market technologies. At present, the entire process of stock exchange i.e. stock transaction is conducted though information technology system. This has made the process fast, transparent and viable. Online trading and speculation has become a trend in the developed as well as in the developing nations. Any external or internal news relating to a specific stock affects its price movements and it can be easily traced with the help of technologies used in the stock market (Fabozzi et al, 2002, p.373). Investors are an important and integral part of entire capital market structure as they are the potential fund providers for shareholders. Basic goal of a profit making business organisation is to increase the shareholders’ wealth and hence, the business organisations aims to offer multiple benefits to their shareholders. Dividend offering is one of the common policies that aims to increase the shareholders’ wealth. Bodie, Merton, and Cleeton have argued that favourable dividend policy tends to maximise shareholders wealth in a number of ways like “tax regulations, the costs of external finance, and the information or “signaling” content of dividends” (Bodie, Merton and Cleeton, 2008, p.281). Moreover, companies often use the dividend announcements as tools for market signalling that helps to develop a positive perception among the existing and potential shareholders. Thus, dividend announcement influences stock demand in a number ways. This section will attempt to present a theoretical background of dividend policies by analysing the previous literatures. 2.2. Theoretical Background Many scholars have presented their views regarding the dividend policies and its impact on share prices. They also have developed a number of models and theories that help to demonstrate the prevailing relationship with dividends and share prices. Dividend policies and share prices are the matter of capital markets and hence, before establishing any conclusion about the relationship between dividend announcements and share prices, they attempted to define the structure and features of capital market. Efficient Market Hypothesis (EMH) is a celebrated concept in finance that defines an efficient market and this theory was first explained by Eugene Fama and Paul A. Samuelson in 1960. Basically, it is an investments theory that explains that the market is very efficient and no investor can earn excess return on stock. Blume and Durlauf have commented that “the efficient markets hypothesis (EMH) maintains that market prices fully reflect all available information” and moreover, the entire market is frictionless i.e. efficient (Lo, 2007, p.1). EMH categorises the capital market into three forms i.e. weak form, semistrong form and strong form (Fischer and Jordon, 1995, p.552). Aharony and Swary (1980) have investigated the relationship between the dividend announcement and earning and they found that the semistrong form of capital market supports the relationship of dividend and earnings (Baker, 2009, p169). Watts (1973) and Pettit (1972) also measured the share price movements after the dividend announcements dates and they reached the same conclusion “which again supported the EMH view of price behaviour” (Asamoah, 2010, p.2). The Gordon model and Walter model of dividend is also popular as it presents the relationship between the dividend policy and market price of shares. Walter model believes that the relationship between the two is for long run and both are linearly related with each other (Kapil, 2011 p.318). The Gordon dividend growth model also determines the changing price of a share by assuming that dividends keep growing at certain growth rate (Smart and Megginson, 2008, p.172). These two models are very important and widely used to determine the expected value of share prices based on the dividend payout ratio. 2.2 Some previous tests conducted on the Exchange Markets Dubai Financial Market (DFM) is a new and an emerging stock exchange as it started its first trading from March 07, 2007. It has a trading history over the last four years and hardly any empirical study has been conducted based on this stock exchange. Therefore, it has not been possible to identify the feature of this market or realize this stock exchange belongs to which form of market i.e. weak, semistrong and strong. This makes impossible for any historical research paper to understand the relationship between the dividend announcements and stock prices in DFM. However, the topic, dividend policy and stock prices have remained one of the famous areas of study, and many scholars and researchers have presented their empirical studies on this topic based on different stock exchanges of developing and developed countries. Moreover, there are also some other studies which have been conducted that establish the core features of stock markets and investors’ behaviours in case of any relevant market information. Information is one of the primary factors that lead to changing the stock price and availability of information in a market which determines its efficiency level (Moyer, McGuigan and Kretlow, 2008, p.40). Brio, Perote and Pindado have conducted an empirical to measure the impact of the investments announcement by corporate on the stock prices based on the Spanish stock exchange. They have found that corporate announcements are very significant in influencing a stock. The investments announcements tend to shape the shareholders’ perceptions as investors believe that additional capital investments helps to earn higher profit and hence, a higher return can be excepted from its share. Furthermore, their study disclosed that the market started to react as soon as the announcement is made publically. However, it assumes that the market is semistrong (Brio, Perote and Pindado, 2003). Olatundun Janet Adelegan has tried to relate the market efficiency and share prices influenced by the dividend announcement. He conducted an investigation on this based on the Nigerian Stock Exchange. The entire study focused on the semistrong efficiency level of Nigerian capital market for investigating the effect of dividend announcement on share price level. Nigerian stock market is developed like other developing or developed countries and hence, the dividend announcements and earning are usually at the same date. To investigate the dividend announcement and share prices, he used 595 dividends for adjusting with the share prices and he collected the historical data from 1990 till 1999. Ultimately, his findings revealed that in spite of Nigerian stock market’s inefficiency at semistrong level, there had been reactions in price of the stock due to dividend announcements (Adelegan, 2003). Lonie et al carried out an extensive empirical study to determine the reaction of dividend announcement in UK capital market. They collected historical relevant data for UK companies for the six months period i.e. January to June in 1991. In the course of their study, their primary focus was on the abnormal returns as an effect of dividend announcements. At the end, they found that abnormal return based on the dividend signalling theory i.e. good-news and bad-news of the company leads to offer “large positive abnormal returns” and “largest negative abnormal returns” respectively (Lonie et al, 1996). Michael Firth’s study on share price movement due to earning announcement by the companies disclosed matured outcomes. He concluded that investors use announcements and also compared the similar companies’ movements to re-evaluate the stock prices. Moreover, the financial statements are also a very crucial tool for them in managing their portfolios and hence, they expect their companies to maintain a standard and well comparable financial reporting policy (Firth, 1976). Reference 1. Asamoah, G. N. April 2010. The Impact of Dividend Announcement on Share Price Behaviour in Ghana. Journal of Business & Economics Research. Volume 8, Number 4. [Pdf]. Available at: http://www.cluteinstitute-onlinejournals.com/PDFs/1845.pdf. [Accessed on March 24, 2011]. 2. Adelegan, O. J. 2003. Capital Market Efficiency and the Effects of Dividend Announcements on Share Prices in Nigeria. African Development Bank. Blackwell Publishing Ltd. 3. Baker, H. K. 2009. Dividends and Dividend Policy. John Wiley and Sons. 4. Besley S. and Brigham, E. F. 2007. Essentials of managerial finance. 14th ed. Cengage Learning. 5. Bodie, Z, Merton, R. C. and Cleeton, D. L. 2008. Financial Economics. 2nd ed. Pearson Education India. 6. Brio, Perote and Pindado, June/July 2003. Measuring the Impact of Corporate Investment Announcements on Share Prices: The Spanish Experience. Journal of Business Finance & Accounting, 30(5) & (6), June/July 2003, 0306-686X. 7. CBL Economic Review. August 2009. Importance of Capital Market as an instrument of Economic Development. [Pdf]. Available at: http://www.centralbank.org.ls/publications/Econo_Rev_August_2009.pdf. [Accessed on March 24, 2011]. 8. CCH Editors. 2009. Australian master tax guide: tax year end edition 30 June 2009. 45th ed. CCH Australia Limited, 9. Dubai Financial Market-a. March 24, 2011. Overview. [Online]. Available at: http://www.dfm.ae/pages/default.aspx?c=801. [Accessed on March 24, 2011]. 10. Dubai Financial Market-b. March 25, 2011. Market Historical Graph. [Online]. Available at: http://services.dfm.ae/charts/Charts.asp?id=HG_MarketIndex&period=3YR. [Accessed on March 24, 2011]. 11. Gray, G., Cusatis, P. and Woolridge, J. R. 2003. Streetsmart guide to valuing a stock: the savvy investors key to beating the market. 2nd ed. McGraw-Hill Professional. 12. Fabozzi F. J. et al, 2002. Foundations of Financial Markets & Institutions. 3rd ed. Pearson Education India. 13. Fischer, D. E. and Jordon, R. J. 1995. Security Analysis and Portfolio Management. Pearson Education India. 14. Firth, M. June 1976. The Impact of Earnings Announcements on the Share Price Behaviour of Similar Type Firms. The Economic Journal, Vol. 86, No. 342 (Jun., 1976), pp. 296-306. 15. Khan, A. and Zuberi, V. 1999. Stock Investing for Everyone: Tools for Investing Like the Pros. 2nd ed. John Wiley and Sons. 16. Kapil, S. 2011. Financial Management. Pearson Education India. 17. Lo, A. W. May 22, 2007. Efficient Markets Hypothesis. [Pdf]. Available at: http://web.mit.edu/alo/www/Papers/EMH_Final.pdf. [Accessed on March 25, 2011]. 18. Lonie, A. A. et al. 1996. The stock market reaction to dividend announcements A UK study of complex market signals. Journal of Economic Studies. Vol. 23 No. 1, 1996, pp. 32-52. 19. Moyer, R. C., McGuigan, J. R. and Kretlow, W. J. 2008. Contemporary Financial Management. 11th ed. Cengage Learning. 20. Shah, P.P. 2005. Financial Management + With CD Indian Text Edition. Dreamtech Press. 21. Smart, S. and Megginson, W. L. 2008. Introduction to corporate finance. Cengage Learning EMEA. Read More