Impact of Dividend Announcements on Stock Prices – An Analysis of Some Select Sectors

The concept of Efficient Market Hypothesis (EMH) is debated widely across the world by academicians and other professionals, for its validity. Researchers have examined the stock price reaction to various informational disclosures such as Mergers and Acquisitions, changes in credit rating, earnings announcements, stock split and dividend announcements. The EMH asserts that investors cannot outdo the market with any kind of information may it be historical, public or private information. Dividend announcements are an important piece of information to the investors in the stock market. According to the dividend signalling theory, an announcement about the increase in the dividend payout indicates positive future prospects of the organisation. This information is perceived to be good news among the investor community and hence should have a positive impact on the stock prices. However, analysts and investors view this theory sceptically. In this background, this paper analyses the impact of dividend announcement, for three mature industries namely Information Technology (IT), Banking and Pharmaceutical companies, on the stock prices for the period 2014 and 2015. We use event study methodology to estimate the expected return from a security. It was found that the dividend announcements made by IT, Banking and Pharmaceutical companies had minimum impact on their stock prices, which shows that the dividend signalling theory has not been successful during the period of study for the said sectors. Further, it was also observed that the CAARs of Banking companies declined continuously.