Effect of Dividend Announcement on Shareholders’ Value - Article Review

8/6/2019 Effect of Dividend Announcement on Shareholders’ Value - Article Review

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Article Review:

Effect of Dividend Announcement onShareholders’ Value:

Evidence from Dhaka Stock Exchange

Submitted to,

Melita Mehjabeen

Course Instructor

Submitted by,

Omaer Ahmad, Zr- 09

Kawsar Ahmad, Zr- 50

Rafaat Wasik Ahmed, Zr-53

Nasim Ul Haque, Zr-54

Rashed Al Ahmad Tarique, Zr- 61

BBA-16th Batch

Institute of Business Administration

University of Dhaka



Article Background The objective of the article was to identify if there was any actual gain by the

shareholders from the announcement of dividends by a firm. The Modigliani-Miller

Proposition which states that declaring dividends do not actually affect shareholder

value was tested on the Dhaka Stock Exchange.

The article is causal in nature which tries to find out whether there is any cause and

effect relationship between dividends and any realizable gain of the shareholders.

Among the findings of the article was that investors, taking into account the initial

increase and then the reduction from the ex-dividend price, actually lost value as a

result of dividend announcements. A possible cause could be the adverse effect of

taxes applicable on dividends. However, some of the lost value is recouped through

the dividend yield on shares. Another interesting find from the analysis was that the

price gain took place before the actual announcement was made.

A suggestion made by the article was that the Securities and Exchange

Commission and the Dhaka Stock Exchange should reconsider its criteria for

categorization of shares. Currently, they used the consistency of dividends as the

yardstick for categorizing shares. As dividend declaration actually is seen to erode

shareholders’ wealth, companies should not be encouraged to declare dividends to

remain in the good books. Rather, some other benchmark should be established for

such categories.

Review of MethodologyIn order to find out the existence of any relationship between dividends and gains

by shareholders, the informational impact of announcement of dividends on future

prospects of dividends was put under test.

137 firms listed on the Dhaka Stock Exchange (DSE) who declared dividends during

the period October 2001 to September 2002 were studied for the purpose of the

article. DSE all-share price index was used as the proxy of average market price.

The market prices of the share prices from 30 days before dividend announcement



and 30 days after were analyzed. The tools used for the analysis were the

Cumulative Abnormal Returns, Market Adjusted – Abnormal Returns and t-test of

the returns from stocks.

Commentary of the Article The sample frame for the article included the 137 enlisted companies that declared

dividends during the period from October 2001 to September 2002. This frame was

chosen as the period was considered to be politically and economically stable. The

general elections have been concluded a while back and so political unrest was

considered to be low. However, the author failed to incorporate the after effects of

the September 11, 2001 bombings that shook the global economy. These did have

some repercussions on the local Stock Exchanges as well. Also, comparisons ought

to have been made with a different time-period after the ironing out of the market

from the fall out in the 1997 crash. In addition, the second stock exchange in the

country, the Chittagong Stock Exchange (CSE), should have been incorporated in

order to find the impact in the overall securities markets in Bangladesh.

The comparisons in calculations of the CAR and the MARR were made with the DSE

General Index and not the indices of the individual industries to which the firms

belonged. Industry-wide trends would have provided a more useful output from the

study. However, as the focus of the study was purely academic, the general trend is

perhaps not such a drawback either.

The Cumulative Abnormal Return and Market Adjusted-Average Return tests were

combined with a t-test. The MAAR calculated the fluctuations in the returns from the

individual securities by comparing the returns on the security with the market

return. This tool is justifiable for gauging the effect of changes in security prices as

a result of a particular event that affects prices. The CAR calculates a summation of

all the MAARs in the market over the period of the study. Again, this is a good

indicator of the shifts in overall market as a result of dividend announcement. The t-

test compares the means of the sample with the mean from the market. In order to

calculate this value, we do not need to know the standard deviation for the entire

population (all the shares in the market) and only 30 sample sizes would be

required. As we use 137 sample units, the author should have used a z-test as the



standard deviation of the market is also easy to calculate from the available

information from the SEC and DSE. Hence a less that accurate value for the

deviation is found and hence a lower chance of identifying statistically significant

results.

The findings of the article as summarized above do seem to provide insightful

information about the alignment of our market to the standard literature preached

in institutions. It also concludes with a food for thought of the regulatory bodies that

paves way for further research to be conducted on the topic.

Another important thing to note, it is not mentioned whether calendar effects, such

as Holiday effects, are controlled or not. For example, there is a strong relationship

between budget announcement and price change. As a huge no of company

announces dividend before or after the budget announcement it should be analyzed

carefully.

Conclusion The article is clear and well written in an easy-to-understand language for non-

academics to understand. It draws on a number of references which allow the

reader to further read up on the topic in discussion. However, the article is not

without its flaws. Choice of just a single time-frame and a single exchange to make

conclusions on the working of the entire market and an important topic such as

dividends, a significant part of the stockholders’ income, would be a tough sell. But

as in any good research paper, the article does pave the way for future work on the

topic and also provides some well targeted advice to the regulatory authorities.

Documents

Effect of Dividend Announcement on Shareholders’ Value - Article Review