Gp on Dividend

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1.1 Introduction

Dividends are payments made by a corporation to its shareholder members. It is the

portion of corporate profits paid out to stockholders. When a corporation earns a profit or

surplus, that money can be put to two uses: it can either be re-invested in the business (called

retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a

portion of their earnings and pay the remainder as a dividend.

For a joint stock company, a dividend is allocated as a fixed amount per share. Therefore,

a shareholder receives a dividend in proportion to their shareholding. For the joint stock

company, paying dividends is not an expense; rather, it is the division of an asset among

shareholders. Public companies usually pay dividends on a fixed schedule, but may declare a

dividend at any time, sometimes called a special dividend to distinguish it from a regular one.

Dividends are usually settled on a cash basis, store credits (common among retail

consumers' cooperatives) and shares in the company (either newly-created shares or existing

shares bought in the market.) Further, many public companies offer dividend reinvestment plans,

which automatically use the cash dividend to purchase additional shares for the shareholder.

Several factors must be considered when establishing a firms dividend policy. These include

The liquidity position of the firm just because a firm has income doesnt mean that

it has any cash to pay dividends.

Need to repay debt oftentimes there are negative covenants that restrict the

dividends that can be paid as long as the debt is outstanding.

The rate of asset expansion the greater the rate of expansion of the firm, the greater

the need to retain earnings to finance the expansion.

Control of the firm if dividends are paid out today, equity may have to be sold in

the future causing a dilution of ownership.

Legal Considerations:

Technically, it is illegal to pay a dividend except out of retained earnings. This is to

prevent firms from liquidating themselves out from underneath the creditors.

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Is it in the best interests of shareholders to pay out earnings as dividends or to reinvest

them in the company? The answer to this depends upon the investment opportunities that the

firm has.

There are three fundamental policies to paying cash dividends that firms employ:

Pay a constant dollar amount each year regardless of earnings per share. This is what most

firms do.

Use a constant payout ratio (for example, 50% of EPS)

Pay a low, fixed dividend amount plus dividend extras or special dividends. This allows

the company to avoid having to cut dividends since the basic dividend is low, but also avoids

the improper accumulation of funds during good years.

A cut in dividends generally hurts a stocks price because it sends a signal to stockholders

that managements outlook for the future is that the company cannot continue to pay the

dividend. Most companies therefore start off with a low dividend and only increase it when they

feel that the earnings prospects have improved sufficiently to allow for maintaining a higher

dividend. Many companies will even borrow money in a bad year in order to avoid cutting the

dividends.

The market price is influenced by dividends through what is called the clientele effect.

That is, some investors want dividends (such as retirees and pension funds) while others do not

want dividends (wealthy individuals) but would prefer capital gains (which are taxed at a lower

rate and deferred).

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1.2 Forms of Payment

Cash dividends (most common) are those paid out in the form of a cheque. Such dividends are a

form of investment income and are usually taxable to the recipient in the year they are paid. This

is the most common method of sharing corporate profits with the shareholders of the company.

For each share owned, a declared amount of money is distributed. Thus, if a person owns 100

shares and the cash dividend is $0.50 per share, the person will be issued a cheque for $50.

Stock or scrip dividends are those paid out in form of additional stock shares of the issuing

corporation, or other corporation (such as its subsidiary corporation). They are usually issued in

proportion to shares owned (for example, for every 100 shares of stock owned, 5% stock

dividend will yield 5 extra shares).

Property dividends or dividends in specieare those paid out in the form of assets from the

issuing corporation or another corporation, such as a subsidiary corporation. They are relatively

rare and most frequently are securities of other companies owned by the issuer, however they can

take other forms, such as products and services.

Other dividends can be used in structured finance. Financial assets with a known market value

can be distributed as dividends; warrants are sometimes distributed in this way. For large

companies with subsidiaries, dividends can take the form of shares in a subsidiary company. A

common technique for "spinning off" a company from its parent is to distribute shares in the new

company to the old company's shareholders. The new shares can then be traded independently.

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1.3 Dates

Dividends must be "declared" (approved) by a companys Board of Directors each time they are

paid. For public companies, there are four important dates to remember regarding dividends.

These are discussed in detail with examples at the Securities and Exchange Commission site

The declaration date is the day the Board of Directors announces its intention to pay a dividend.

On this day, a liability is created and the company records that liability on its books; it now owes

the money to the stockholders. On the declaration date, the Board will also announce a date of

record and a payment date.

The in-dividend date is the last day, which is one trading day before the ex-dividend date, where

the stock is said to be cum dividend In other words, existing holders of the stock and anyone who

buys it on this day will receive the dividend, whereas any holders selling the stock lose their right

to the dividend. After this date the stock becomes ex dividend.

The ex-dividend date is the day on which all shares bought and sold no longer come attached

with the right to be paid the most recently declared dividend. This is an important date for any

company that has many stockholders, including those that trade on exchanges, as it makes

reconciliation of who is to be paid the dividend easier. Existing holders of the stock will receive

the dividend even if they now sell the stock, whereas anyone who now buys the stock will not

receive the dividend. It is relatively common for a stock's price to decrease on the ex-dividend

date by an amount roughly equal to the dividend paid. This reflects the decrease in the company's

assets resulting from the declaration of the divGidend Whenever a company announces a

dividend pay-out, it also announces a "Book closure Date" which is a date on which the company

will ideally temporarily close its books for fresh transfers of stock. Read "Book Closure" for a

better understanding. Shareholders who properly registered their ownership on or before the date

of record, known as stockholders of record, will receive the dividend. Shareholders who are

not registered as of this date will not receive the dividend. Registration in most countries is

essentially automatic for shares purchased before the ex-dividend date. The payment date is the

day when the dividend checks will actually be mailed to the shareholders of a company or

credited to brokerage accounts.

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1.4 Types of Dividend Policies

There are many distinct dividend policies, but most policies fall into categories.

(A) A stable dividend policy is characterized by the tendency to keep a stable dollar amount

of dividends per share from period to period.

Corporations tend to establish a predetermined target dividend payout ratio in which dividends

are increased only after management is convinced that future earnings can support the higher

dividend payment. Under this policy, dividend changes will normally lag behind earnings

changes. Firms are reluctant to lower their dividend payments, even in times of financial distress.

Most firms follow a relatively stable dividend policy for four reasons:

Many business executives believe that stable dividend policies lead to higher stock

prices. The empirical evidence on the relationship between dividend policy and stock

prices is inconclusive.

Investors may view constant or steadily increasing dividends as more certain than a

fluctuating cash dividend payment.

There is less chance to signal erroneous informational content with a stable dividend

policy. Thus, firms tend to avoid reducing the annual dividend because of the

information content that a dividend cut may Convey.

EXAMPLE: Americana Products, Inc. earned $4,000,000 last year and paid $1.40 per share in

dividends on 1,000,000 outstanding shares. Because of a temporary slump in the market, the firm

expects to earn $3,600,000 this year. If the Company maintains a stable dividend policy, it will

maintain a $1.40 dividend per share, despite the expected decline in earnings.

(B) A constant dividend payout ratio policy is one in which a firm pays out a constant

percentage of earnings as dividends.

This policy is easy to administer once the firm selects the initial payout ratio. A constant

dividend payout policy will cause dividends to be unstable and unpredictable, if earnings

fluctuate. Few firms follow a constant dividend payout policy because stock prices may be

adversely affected by highly volatile dividends.

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1.5 FACTORS AFFECTING DIVIDEND POLICY

1. Stability of Earnings. The nature of business has an important bearing on the dividend policy.

Industrial units having stability of earnings may formulate a more consistent dividend policy

than those having an uneven flow of incomes because they can predict easily their savings and

earnings. Usually, enterprises dealing in necessities suffer less from oscillating earnings than

those dealing in luxuries or fancy goods.

2. Age of corporation. Age of the corporation counts much in deciding the dividend policy. A

newly established company may require much of its earnings for expansion and plant

improvement and may adopt a rigid dividend policy while, on the other hand, an older company

can formulate a clear cut and more consistent policy regarding dividend.

3. Liquidity of Funds. Availability of cash and sound financial position is also an important

factor in dividend decisions. A dividend represents a cash outflow, the greater the funds and the

liquidity of the firm the better the ability to pay dividend. The liquidity of a firm depends very

much on the investment and financial decisions of the firm which in turn determines the rate of

expansion and the manner of financing. If cash position is weak, stock dividend will be

distributed and if cash position is good, company can distribute the cash dividend.

4. Extent of share Distribution. Nature of ownership also affects the dividend decisions. A

closely held company is likely to get the assent of the shareholders for the suspension of

dividend or for following a conservative dividend policy. On the other hand, a company having a

good number of shareholders widely distributed and forming low or medium income group,

would face a great difficulty in securing such assent because they will emphasis to distribute

higher dividend.

5. Needs for Additional Capital. Companies. Retain a part of their profits for strengthening

their financial position. The income may be conserved for meeting the increased requirements of

working capital or of future expansion. Small companies usually find difficulties in raising

finance for their needs of increased working capital for expansion programmers. They having no

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other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at

low rates and retain a big part of profits.

6. Trade Cycles. Business cycles also exercise influence upon dividend Policy. Dividend policy

is adjusted according to the business oscillations. During the boom, prudent management creates

food reserves for contingencies which follow the inflationary period. Higher rates of dividend

can be used as a tool for marketing the securities in an otherwise depressed market. The financial

solvency can be proved and maintained by the companies in dull years if the adequate reserves

have been built up.

7. Government Policies. The earnings capacity of the enterprise is widely affected by the

change in fiscal, industrial, labour, control and other government policies. Sometimes

government restricts the distribution of dividend beyond a certain percentage in a particular

industry or in all spheres of business activity as was done in emergency. The dividend policy has

to be modified or formulated accordingly in those enterprises.

8. Taxation Policy. High taxation reduces the earnings of he companies and consequently the

rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of

dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond

10% of paid-up capital are subject to dividend tax at 7.5 %.

9. Legal Requirements. In deciding on the dividend, the directors take the legal requirements

too into consideration. In order to protect the interests of creditors an outsiders, the companies

Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend.

Moreover, a company is required to provide for depreciation on its fixed and tangible assets

before declaring dividend on shares.

10. Past dividend Rates. While formulating the Dividend Policy, the directors must keep in

mind the dividend paid in past years. The current rate should be around the average past rat. If it

has been abnormally increased the shares will be subjected to speculation. In a new concern, the

company should consider the dividend policy of the rival organisation.

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11. Ability to Borrow. Well established and large firms have better access to the capital market

than the new Companies and may borrow funds from the external sources if there arises any

need. Such Companies may have a better dividend pay-out ratio. Whereas smaller firms have to

depend on their internal sources and therefore they will have to built up good reserves by

reducing the dividend payout ratio for meeting any obligation requiring heavy funds.

12. Policy of Control. Policy of control is another determining factor is so far as dividends are

concerned. If the directors want to have control on company, they would not like to add new

shareholders and therefore, declare a dividend at low rate. Because by adding new shareholders

they fear dilution of control and diversion of policies and programmes of the existing

management. So they prefer to meet the needs through retained earing. If the directors do not

bother about the control of affairs they will follow a liberal dividend policy.

13. Repayments of Loan. A company having loan indebtedness are vowed to a high rate of

retention earnings, unless one other arrangements are made for the redemption of debt on

maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders put

restrictions on the dividend distribution still such time their loan is outstanding.

14. Time for Payment of Dividend. When should the dividend be paid is another consideration.

Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a

time when is least needed by the company because there are peak times as well as lean periods of

expenditure. Wise management should plan the payment of dividend in such a manner that there

is no cash outflow at a time when the undertaking is already in need of urgent finances.

15. Regularity and stability in Dividend Payment. Dividends should be paid regularly because

each investor is interested in the regular payment of dividend. The management should, inspite

of regular payment of dividend, consider that the rate of dividend should be all the most constant.

For this purpose sometimes companies maintain dividend equalization Fund.

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Research Problem:

Efficient Market Hypothesis states that it is impossible to beat the market because the stock

market efficiency causes the stock prices to incorporate and reflect all the new information in the

stock prices. We want to study whether the markets are efficient when the dividend policy is

announced by the corporate. There are certain issues which are to be focused upon.

To find out any relation between corporate dividend policy and market value of a

company.

To analyze the effect of corporate dividend decisions in terms of creating abnormality in

the price and volume of the company.

To check whether the markets are efficient when any news about dividend decisions of a

company is received.

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Literature Review:

Modigliani and Miller (1961) have shown, investors may be indifferent about the

amount of dividend as it has no influence on the value of a firm. Any investor can create

a home made dividend if required, or can invest the proceeds of a dividend payment in

additional shares as and when a company makes dividend payment. Similarly, managers

may be indifferent as funds would be available or could be raised without any floatation

costs for all positive net present value projects.

Lintner (1956) analyzes as to how firms set dividends and concluded that firms have

four important concerns. Firstly, firms have long-run target dividend payout ratios. The

payout ratio is high in case of mature companies with stable earnings and low in case of

growth companies. Secondly, the dividends change follows shift in long-term sustainable

earnings.

Brealey (1992) poses the dividend policy decision as What is the effect of change in

cash dividends, given the firms capital-budgeting and borrowing decisions? In other

words, he looks at dividend policy in isolation and not as a by-product of other corporate

financial decisions.

Baker, Veit and Powell (2001) study the factors that have a bearing on dividend policy

of corporate firms traded on the Nasdaq. The study, based on a sample survey (1999)

response of 188 firms out of a total of 630 firms that paid dividends in each quarter of

calendar years 1996 and 1997, finds that the following four factors have a significant

impact on the dividend decision: pattern of past dividends, stability of earnings, and

the level of current and future expected earnings. The study also finds statistically

significant differences in the importance that managers attach to dividend policy in

different industries such as financial versus non-financial firms.

Fama and French (2001) analyzed the issue of lower dividends paid by corporate firms

over the period 1973-1999 and the factors responsible for the decline. In particular, they

analyzed whether the lower dividends were the effect of changing firm characteristics or

lower propensity to pay on the part of the firms. They observed that proportion of

companies paying dividend has dropped from a peak of 66.5% in 1978 to 20.8% in 1999.

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Objectives of the Study:

To explore the insight of a corporate event named Dividend Policy which drags lot of

attention and results into may drastic changes in the market valuation of he firm.

To study the impact of dividend on the price and volume before and after such

dividend is announced.

To check whether abnormality exists in the price and volume of the share as the

dividend is announced.

To find out the room for leakage of any insider information about dividend policy of a

company

To check whether any insider information plays any part in abnormal trading effect and

abnormal price effect in a script.

To analyze the bearing of such abnormality (if it does exist) on the market

capitalization and volumes traded on the stock market a month before the

Announcement Date and a month after the ex-dividend date for all the scripts under the

study.

To measure the cumulative impact of corporate dividend policy and try to conceive a

general trend based on it.

Research Design:

Exploratory Research

Scope of the Study:

To do a relative analysis between BSE-500 index and share prices of selected

companies.

Limited to Top 30 companies according to market capitalization and which have

declared dividend in the year 2010.

Limited to BSE-500 companies only.

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Sampling:

Sampling Technique : Judgmental sampling

Sampling Unit : One company of BSE-500

Sampling Size : 30 companies from BSE-500 index

Data Sources:

Secondary Data

Internet Sources

Business Journals

Research papers

Method of Analysis:

CAPM (Regression Model)

Limitation of the Survey:

The results of the analysis might differ if any model other than CAPM (Regression

Model) is used.

The study is limited to the top 30 companies from BSE-500 index, which have declared

dividend in the year 2010.

While studying the effect of corporate dividend policy on the market price of the script,

it is assumed that all the other factors affecting the market price are constant.

In this part, we will explain you how we have calculated the abnormal return using the excel

worksheet from the data that we got from the Prowess Database. We will also explain you how

to read each and every data and information that we generated and mentioned in the report.

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Steps to find out Abnormal Price Effect

A. Collect data from Prowess Database and sent it to Excel Worksheet

As we mentioned earlier, we gathered daily share price data from Prowess Database

software and then to process on the data we sent them to the excel worksheet. The above sheet

represents the type of data that we got. We got closing price data, total volume traded, number of

trade took place during the day, total turnover took place during the day, total market capital of

BSE 500 and closing value of BSE 500 index

B. Find out daily script return

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To process further, we need to find out daily script return of each day in comparison with

the previous days closing price. As this sheet represents how we found out the daily script return

in percentage terms by taking previous days closing as base.

C. Find out daily Market Return

To find out the daily market return, we used the same formula as we had used in finding out

the daily script return. As we can see in this sheet, we found out the BSE 500 return by

taking previous days closing as a base. The return that we found out by the mentioned

formula was in terms of numbers, but we turned it into percentage to make it meaningful

interpretation.

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3.1 Introduction

In finance, the efficient-market hypothesis (EMH) asserts that financial markets are

"information ally efficient". The weak version of EMH supposes that prices on traded assets

(e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-

strong version supposes that prices reflect all publicly available information and instantly change

to reflect new information. The strong version supposes that market reflects even hidden/inside

information. There is some disputed evidence to suggest that the weak and semi-strong versions

are valid while there is powerful evidence against the strong version. Therefore, according to

theory, it is improbable to consistently outperform the market by using any information that the

market already has, except through inside trading.

The efficient-market hypothesis was developed by Professor Eugene Fama at the University Of

Chicago Booth School Of Business as an academic concept of study through his published Ph.D.

thesis in the early 1960s at the same school. It was widely accepted up until the 1990s, when

behavioral finance economists, who were a fringe element, became mainstream. Empirical

analyses have consistently found problems with the efficient-market hypothesis, the most

consistent being that stocks with low price to earnings outperform other stocks. Alternative

theories have proposed that cognitive biases cause these inefficiencies, leading investors to

purchase overpriced growth stocks rather than value stocks.

3.2 The Efficient Market Hypothesis

When the term efficient market was introduced into the economics literature thirty

years ago, it was defined as a market which adjusts rapidly to new information (Fama et al

1969).It soon became clear, however, that while rapid adjustment to new information is an

important element of an efficient market, it is not the only one. A more modern definition is that

asset prices in an efficient market fully reflect all available information (Fama 1991). This

implies that the market processes information rationally, in the sense that relevant information is

not ignored, and systematic errors are not made.

Fundamentals. The words in this definition have been chosen carefully, but they

nonetheless mask some of the subtleties inherent in defining an efficient asset market. For one

thing, this is a strong version of the hypothesis that could only be literally true if all available

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information was costless to obtain. If information was instead costly, there must be a financial

incentive to obtain it.

Secondly, what does it mean to say that prices are consistent with fundamentals? We

must have a model to provide a link from economic fundamentals to asset prices. While there are

candidate models in all asset markets that provide this link, no-one is confident that these models

fully capture the link in an empirically convincing way. This is important since empirical tests of

market efficiency especially those that examine asset price returns over extended periods of

time are necessarily joint tests of market efficiency and a particular asset-price model.

Finally, a comment about the word efficient. It appears that the term was originally

chosen partly because it provides a link with the broader economic concept of efficiency in

resource allocation. Thus, Fama began his 1970 review of the efficient market hypothesis

(specifically applied to the stock market):

The primary role of the capital [stock] market is allocation of ownership of the

economys capital stock. In general terms, the ideal is a market in which price provide accurate

signals for resource allocation: that is, a market in which firms can make production-investment

decisions, and investors can choose among the securities that represent ownership of firms

activities under the assumption that securities prices at any time fully reflect all available

information.

3.3 Predictions of Efficient Market Hypothesis

The efficient market hypothesis yields a number of interesting and testable predictions about the

behavior of financial asset prices and returns. Consequently, a vast amount of empirical research

has been devoted to testing whether financial markets are efficient. While the bad model

problem plagues some of this research, it is possible to draw important conclusions about the

informational efficiency of financial markets from the existing body of empirical research. This

section presents a selective survey of the evidence. Our conclusions are summarised in the table

and explained in more detail in the pages that follow.

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3.4 Random Walk Theory

What It Is:

The random walk theory states that market and securities prices are random and not influenced

by past events. The idea is also referred to as the "weak form efficient-market hypothesis."

Princeton economics professor Burton G. Malkiel coined the term in his 1973 book A Random

Walk Down Wall Street.

3.5 How it Works/Example:

The central idea behind the random walk theory is that the randomness of stock prices renders

attempts to find price patterns or take advantage of new information futile. In particular, the

theory claims that day-to-day stock prices are independent of each other, meaning that

momentum does not generally exist and calculations of past earnings growth does not predict

future growth. Malkiel states that people often believe events are correlated if the events come in

"clusters and streaks," even though streaks occur in random data such as coin tosses.

The random walk theory also states that all methods of predicting stock prices are futile in the

long run. Malkiel calls the notion of intrinsic value undependable because it relies on subjective

estimates of future earnings using factors like expected growth rates, expected dividend payouts,

estimated risk, and interest rates.

The random walk theory also considers technical analysis undependable because, according to

Malkiel, chartists buy only after price trends are established and sell only after price trends are

broken; essentially, the chartists buy or sell too late and miss the boat. According to the theory,

this happens because stock prices already reflect the information by the time the analyst moves

on the stock. Malkiel also notes that the widespread use of technical analysis reduces the

advantages of the approach.

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Malkiel acknowledges some statistical anomalies pointing to some exceptions to the random

walk theory:

Prices of small, less liquid stocks seem to have some serial price correlation in the short-

term because they do not incorporate information into their prices as quickly.

Contrarian strategies tend to outperform other strategies because reversals are often based

on economic facts rather than investor psychology.

There are seasonal trends in the stock market, especially at the beginning of the year and

the end of the week.

Stocks with low P/E ratios tend to outperform those with high P/Es, although the

tendency is volatile over time.

High-dividend stocks tend to provide higher returns over time because during down

markets the high dividend yields often create demand for these stocks and thus increases

the price.

3.5 Why It Matters:

The random walk theory proclaims that it is impossible to consistently outperform the market,

particularly in the short-term, because it is impossible to predict stock prices. This may be

controversial, but by far the most controversial aspect of the theory is its claim that analysts and

professional advisors add little or no value to portfolios. As Malkiel put it, "Investment advisory

services, earnings predictions, and complicated chart patterns are useless... Taken to its logical

extreme, it means that a blindfolded monkey throwing darts at a newspaper's financial pages

could select a portfolio that would do just as well as one carefully selected by the experts."

Malkiel and the random walk theory provide considerable support to the intimidated individual

investor, but Malkiel in particular encourages investors to understand the theories and investment

methods that the random walk theory challenges. Malkiel therefore advocates a buy-and-hold

investment strategy as the best way to maximize returns.

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3.6 Do Asset Prices Move as Random Walks?

Asset prices in an efficient market should fluctuate randomly through time in response to the

unacticipated component of news (Samuleson 1985). Prices may exhibit trends over time, in

order that the total return on a financial asset exceed the return on a risk-free asset by an amount

commensurate with the level of risk undertaken in holding it. However, even in this case,

fluctuations in the asset price away from trend should be unpredictable. This section examines

the emphirical evidence for this random walk hypothesis for stock prices. On balance, the

evidence suggests that the hypothesis is at least approximately true.

In the aggregate US share market; above-average stock returns over a daily, weekly or monthly

interval increase the likelihood of further above-average returns in the subsequent period

(Campbell, Lo and Mackinlay 1997). However, for example, only about 12 per cent of the

variance in the daily stock price index can be predictability than portfolios of large stocks. There

is also some weak evidence that the degree of predictability has diminished over time. In a

related literature, a number of studies have found evidence of mean reversion in returns on stock

portfolios at horizons of three to five years or longer (Poterba and Summers 1988; Fama and

French 1988).

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4.1 Dividend decisions

Dividends decisions are an important aspect of corporate financial policy since they can has an

effect on the availability as well as the cost of capital. The Lintner proposition which asserts that

the corporate management maintains a constant target payout ratio has been the most influential.

However, the concepts of primary of dividend decisions as well as the reasons for it are not

unambiguously defined. There is a variety of theories which attempt to rationalize the observed

secular constancy of the dividend payout ratio. These studies examine the factors underlying the

secular constancy of the dividend payout ratio. These studies examine the factors underlying the

structure of the management, the nature of the product and financial markets, as well as the

influence of the shareholders in their attempt to explain the Lintner proposition. However, in the

case of any one firm, the following two pertinent questions need to be examined on an empirical

basis to provide substance to the notion of primary of dividend decisions. (a) What are dividend

decisions primary for.

The modeling framework postulates that (a) the dividend decisions may be primary to

management of the firm and/or the shareholder, and (b) each of the decision makers can have a

short run and/or long run objective when they evaluate dividend decisions. Share price increases

have been postulated as the basic short run objective of both the groups of decisions. Share price

increases have been postulated as the basic short run objective of both the groups of decision

makers. Similarly, both the share holders and the management are viewed as net worth

maximizes over long run.

The fundamental hypothesis for the short run models is that the management increases the

dividend per share whenever the share price, and that the share holder responds, to these in such

a way as to increase the share price. This result is expected if dividend decisions are primary for

both the groups.

In the long run context, it was felt that a progressive management would increase the net worth

the firm by investments in fixed assets of through building the reserve base. Dividends would be

primary decision if the internal financing of investment is constrained by the necessity to pay

dividends at a constant rate.

These are two extreme forms on which dividend decisions can be considered to be primary. A

variety of intermediate positions are possible in any specific case of a firm. The models were

designed to accommodate a rich variety of such behavioral patterns. The theoretical structure

was empirically tested for 71 firms of the corporate sector in 6 industries using the data of the

Bombay Stock Exchange Directory for the period 1967-68 to 1980-1. The results generally

indicate that the methodology of the present study would be helpful in examine the notion of the

primary of corporate dividend policy.

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The following are the salient features of the empirical results.

In the case of 17 firms dividend decisions were found to be primary. The factors which

accounted for primary were the following:

Need to build the desired internal reserve base in the long run, and

Inadequacy of funds to finance available investment opportunities while

maintaining a desired payout ratio.

The Lintner hypothesis was validated under the following circumstance:

The managers are oriented towards building up reserves to minimize dependence on

external funds,

There is a lack of motivation or market opportunity for growth of the firm and

There is no shortage of funds to pursue the desired objectives.

Primary of dividends in the long run was observed in the case of 27 firms. The

significant reasons were

Shortage of funds to take care of growth opportunities as well as requisite dividends,

and

Inadequacy of funds the desired reserve base.

Throughout this analysis dividend decisions were considered to be primary, if and only if, both

the groups of decision makers agree to the same objective and respond to each others perception

of goal satisfaction. Viewed from this vantage point dividend decision were primary only in a

few cases. The Lintner hypothesis of a constant dividend payout ratio appears to hold only

because of managerial motivations and not as a response to share holders desire. To that extent

attributing primary to dividend decisions in such content appears to be misplaced. Most of the

management in the corporate sector appears to desire the security of internal financing and build

reserves s a priority after paying certain minimum dividend per share. Despite these conclusions

from the models of the present study two inadequacies became apparent during the course of

work:

26

4.2 Role of insider trading

The existence and implications of asymmetric information in financial markets has been the

subject of extensive research in the finance literature. Two of the major propositions in this

literature are that (1) corporate insiders take advantage of asymmetric information by trading on

their informational advantage and (2) dividend policy is related to asymmetric information.

Taken together, these propositions imply that the dividend policy of a firm and the trading gain

realized by its insiders may be related because both are related to the level of information

asymmetry between the firms inside and outside investors.

The first proposition arises from the widely accepted notion that corporate insiders often possess

and trade on information about the value of their firms shares (relative to the current stock price)

that outside investors do not possess. This information asymmetry gives insiders the ability to

identify and take advantage of mispricing in the shares of their own firms. Jaffe(1974), finnerty

(1976), seyhun (1986), jeng, Metrick, and Zeckhauser (1999), and Lakonishok and Lee (2001)

provide evidence that insiders earn significant abnormal profits from trading in their own firms

shares, though estimates of the sizes of the size of these profits vary widely. It should be noted

that this trading is within the legal boundaries set by the securities and exchange commission

(SEC) and is therefore not illegal insider trading.

The second proposition is consistent with three different theories about the role of dividend

policy in financial markets. The first theory is what we shall refer to as the free cash flow

theory of dividends. This theory focuses on the divergence of interest between managers and

shareholders and on dividends as a disciplining mechanism that reduces the agency cost

associated with such a divergence. The payment of dividend reduces free cash flow, forcing

firms to enter the capital market more frequently and divulge information as they attempt to get

financing for their operations and investments. This subjects them to the scrutiny of investment

bankers, analysts, and potential new investors more often and serves to reduce the investors.

Thus, higher dividend should be associated with reduced information asymmetry, all else being

equal.

The second theory is what we shall call the institutional monitoring theory which is based on

allen bernardo and Welch (2000). This theory rests on two assumptions. The first is that

institutional investors are more effective at monitoring management than retail investors. Due to

the size of their investments and the resources at their disposal, institutional investors have

greater incentive and ability to gather and analyze information pertaining to their investments, as

well as a greater ability to discipline management and push for changes when management

performs poorly. The second assumption is that institutional investors prefer high dividends

relative to individual investors due to mainly the tax effects.

28

AUTO SECTOR

Hero Honda Abnormal Return (Price): (In Percentage)

Time Window Cum. Ab. Volume

AD-30 TO AD-01 -11.63%

AD-10 TO AD-1 2.32%

AD -13.39%

AD+1-ED-1 -2.12%

ED -0.57%

ED+1-ED+10 0.49%

ED+1-ED+30 6.93%

Mean Daily Ab. Return 0.05%

Abnormal Return (Volume):

No AD-30 to

AD-1 AD-10

to AD-1

AD

AD+1 to ED-1

ED

ED+1 to

ED+10

ED+1 to

ED+30

1 Cum. AB 2,433.26 866.75 192.74 28,629,179.75 373,877.20 3,697,713.3

9

8,055,547.7

7

2 Days 30 10 1 53 1 10 30

3 Ave.

Daily AB

(1/2)

81.11 86.68 192.74

540173.20

373877.19

369771.34

268518.26

4 Ave. Vol. 913.80

5 AB/Ave

(3/4)

0.09 0.09 0.21

200.83

409.14

404.65

293.85

29

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

AD-30

AD-10

AD EDED-

10

ED-

30

Series1

% C

um

.AB

.Re

turn

TIME PERIOD

HERO HONDA

Price Effect

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

AD-30 TO AD-

01

AD-10 TO AD-

1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Series1 -11.63% 2.32% -13.39% -2.12% -0.57% 0.49% 6.93%

-11.63%

2.32%

-13.39%

-2.12%-0.57%

0.49%

6.93%%

Cu

m.A

B R

etu

rn

Hero Honda

Cum.AB Return

30

Interpretation

We can see that before announcement date of dividend within the period of 30 days there was

huge abnormal effect on price. This might be because of leakages of insider information. Before

ten days of announcement date there was a sharp rise in prices. Prices tend to fluctuate during the

period between AD to ED. But after effective date nominal changes took place in price. But no

positive cumulative returns are generated. So investors have to think before they invest in this

Interpretation

The above chart and table suggest that there is abnormality in the volume to considerable extent.

Till announcement date there was no huge volume of trade taking place. But after announcement

date the volume trading goes on increasing. On announcement date there was fall in price of the

script but after AD price went on increasing and also the volume was increasing. On ED

maximum volume of trading took place and sharp rise in price was also seen on that date. This

indicates the impact of distribution of dividend news on stock market. However after that the

volume trading went on decreasing as well price after ED+30 has shown a rising trend

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1

TO ED-1ED

ED+1 TO

ED+10

ED+1 TO

ED+30

Series1 0.09 0.09 0.21 200.83 409.14 404.65 293.85

0.09 0.09 0.21

200.83

409.14 404.65

293.85

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

Rat

io o

f A

B V

olu

me

to

Ave

. V

olu

me

Hero Honda

Volume Effect

31

Maruti Suzuki

Abnormal Return (Price): (In Percentage)


AD-30 TO AD-01 -16.78%

AD-10 TO AD-1 -9.31%

AD -1.50%

AD+1-ED-1 -31.58%

ED 0.24%

ED+1-ED+10 -0.78%

ED+1-ED+30 -0.68%

Mean Daily Ab. Return -0.30%


N

o AD-30 to AD-

1

AD-10 to

AD-1

AD

AD+1 to ED-

1

ED

ED+1 to

ED+10

ED+1 to

ED+30

1 Cum.

AB

-1,670,679.03

-

405,328.69

272,920.05

-

14,078,952.9

5

-218,981.95

-

1,328,906.5

9

-

2,972,149.

82

2 Days 30 10 1 130 1 10 30

3 Ave.

Daily

AB (1/2)

-55689.30085

-

40532.8692

3

272920.051

3

-265640.6217

-218981.9487

-132890.659

-

99071.660

68

4 Ave.

Vol.

322488.94

87

5 AB/Ave

(3/4)

-0.17

-0.13

0.85

-0.34

-0.68

-0.41

-0.31

32

-35.00%

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

AD-30 TO

AD-01

AD-10 TO AD-1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Series1 -16.78% -9.31% -1.50% -31.58% 0.24% -0.78% -0.68%

-16.78%

-9.31%

-1.50%

-31.58%

0.24%

-0.78% -0.68%

%C

um

.AB

Re

turn

Maruti Suzuki

Cum.AB Return

-60.00%

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

AD-30

AD-10

AD EDED+10

ED+30

Series1

% C

um

. AB

. R

etu

rn

Time Period

Maruti Suzuki

Price Effect

Series1

33

Interpretation

We can find that there is a perfect negative trend line in the price effect chart. The Cum AB

returns are falling. However on Announcement date a positive rise was seen in price of script but

after that again it went on reducing. Again on during period near ED there was nominal rise in

prices but after that it went on fluctuating and after ten days of ED there was fall in price and

after that it again had rise. So we can interpret that announcement and effective dates had a short

term impact on price but after that price always decreased. This shows the bearish trend in

market has affected the script. This might be due to high positive beta of the script. However this

is not a good script for the investors to invest .

Interpretation

We can see positive abnormal volume on announcement date but after that the volume has shown a

decreasing trend. Before announcement date also there was a negative abnormal volume in script.

But on announcement date maximum volume of trade took place and even there was increase in

price of script on announcement date. This is due to the news of declaration of dividend. We can

say that the move of declaring dividend has not been able to generate either positive abnormal

volume or positive cum AB return for the investors

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 -0.17 -0.13 0.85 -0.34 -0.68 -0.41 -0.31

-0.17 -0.13

0.85

-0.34

-0.68

-0.41 -0.31

-0.80-0.60-0.40-0.200.000.200.400.600.801.00

Rat

io o

f A

B V

olu

me

to

Ave

. V

olu

me

Maruti Suzuki

Volume Effect

34

Tata Motors



N

o

AD-30 to

AD-1

AD-10 to

AD-1

AD

AD+1 to ED-1

ED

ED+1 to

ED+10

ED+1 to

ED+30

1 Cum. AB -139919.63

-40050.05

2902.87

-162581.92

357.87

131518.95

179215.9

7

2 Days 30 10 1 53 1 10 30

3 Ave.

Daily AB

(1/2)

-4663.99

-4005.01

2902.87

-3067.58

357.87

13151.89

5973.87

4 Ave. Vol. 21016.13

5 AB/Ave

(3/4) -0.22

-0.19

0.14

-0.15

0.02

0.63

0.28


AD-30 TO AD-01 -26.62%

AD-10 TO AD-1 2.00%

AD -3.85%

AD+1-ED-1 17.09%

ED -1.22%

ED+1-ED+10 16.13%

ED+1-ED+30 25.56%


35

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

AD-30 TO

AD-01

AD-10 TO AD-1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Series1 -26.62% 2.00% -3.85% 17.09% -1.22% 16.13% 25.56%

-26.62%

2.00%

-3.85%

17.09%

-1.22%

16.13%

25.56%%

Cu

m.A

B R

etu

rnTata Motors

Cum.AB Return

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

AD-

30

AD-10

AD EDED+10

ED+30

Series1

% C

um

. AB

. R

etu

rn

Time Period

Tata MotorsPrice Effect

Series1

36

Interpretation

We can observe a positive Cum AB return before 30 days of announcement date. But before 10

days of announcement date there was sharp fall in the price. However after that again had rise

but for very short period and again on announcement date there was no positive effect on price.

After announcement date there was nominal rise in price but again it followed a declining trend.

But after effective date price started increasing and showed a positive trend. It generated positive

cumulative abnormal return after effective date. This chart shows positive trend in price of script.

Investors have positive expectation about this script so that dividend and other factors in market

are not able to change their expectations. Thus we can say that it is good script to invest.

Interpretation

We can see that there has been a positive effect on volume on announcement and effective date.

However during the period between ED to ED+10 there was maximum effect on volume. During

that time period price also showed a continuous rise. Though after 10 days of effective date there

was a decline seen volume but the price still had shown the rising trend. But still it generates a

positive abnormal volume effect. This indicates a signal of removal of abnormality in the script

volume.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 -0.22 -0.19 0.14 -0.12 0.02 0.63 0.28

-0.22

-0.19

0.14

-0.12

0.02

0.63

0.28

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Rat

io o

f A

B V

olu

me

to

Ave

. V

olu

me

Tata MotorsVolume Effect

37

BANKING SECTOR

SBI Bank



AD-30 TO AD-01 7.47%

AD-10 TO AD-1 -2.30%

AD -2.15%

AD+1-ED-1 0.70%

ED -2.87%

ED+1-ED+10 10.73%

ED+1-ED+30 14.49%



N

o

AD-30 to

AD-1

AD-10 to

AD-1

AD

AD+1 to ED-

1

ED

ED+1 to

ED+10

ED+1 to

ED+30

1 Cum.

AB

-

1,602,983.21

-

1,827,976.31

360,368.2

8

-4,492,536.08

-363,218.72

-

2,915,610.74

-

9,034,619.

79

2 Days 30 10 1 28 1 10 30

3 Ave.

Daily

AB (1/2)

-53432.77

-182797.63

360368.2

8

-84764.83

-363218.72

-291561.07

-

301153.99

4 Ave.

Vol.

1036962.7

2

5 AB/Ave

(3/4)

-0.05

-0.18

0.35

-0.15

-0.35

-0.28

-0.29

38

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

AD-30 TO

AD-01

AD-10 TO

AD-1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Cum. Ab. Return 7.47% -2.30% -2.15% 0.70% -2.87% 10.73% 14.49%

7.47%

-2.30% -2.15%

0.70%

-2.87%

10.73%

14.49%%

Cu

m.A

B.R

etu

rn

TIME PERIOD

SBICum. Ab. Return

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

AD-

30

AD-

10AD ED

ED+10

ED+30

Series1

% C

UM

. AB

. RET

UR

N

TIME PERIOD

SBI BANKPrice Effect

Series1

39

Interpretation

We can view that before the dividend was announced there was a negative Cum.AB. Return. This

chart indicates that on announcement date and effective date the script gave maximum negative

Cum. AB return. But after announcements and effective dates there was a positive cumulative

abnormal return generated. From this chart thus we can generate that this generates positive

cum.AB. Returns for the investors. So this is good script to invest in

Interpretation

As we see that there is a big amount of positive abnormality in volume on announcement date. This

could be due to great amount of liquidity in script and price could be such that small investors

tempted to invest in it. But there is fall in AB volume after announcement date. After annocement

date the volume has decreased. Moreover the price chart also indicates the positive return. This

shows that the decrease in volume is due to the few buyers who are ready to buy this share at higher

price.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 -0.05 -0.18 0.35 -0.15 -0.35 -0.28 -0.29

-0.05

-0.18

0.35

-0.15

-0.35-0.28 -0.29

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

Rat

io o

f A

B V

olu

me

to

Ave

. V

olu

me

SBI BANKVolume Effect

40

ICICI Bank




AD-30 TO AD-01 -8.95%

AD-10 TO AD-1 -3.81%

AD -8.95%

AD+1-ED-1 -7.44%

ED -6.15%

ED+1-ED+10 13.88%

ED+1-ED+30 19.57%


N

o

AD-30

TO AD-1

AD-10

TO AD-1 AD

AD+1

TO ED-1 ED

ED+1 TO

ED+10

ED+1 TO

ED+30

1. CUM. AB

16987202.

77

-

999433.85

38149

68.69

-

32821128

.23

-

141632

60.08

-

17125798.

15

-

48899142.

77

2. DAYS 30.00 10.00 1.00 44.00 1.00 10.00 30.00

3.

AVE.DAILY

AB (1/2) 566240.09 -99943.38

38149

68.69

-

619266.5

7

-

141632

60.08

-

1712579.8

2

-

1629971.4

3

4. AVE.VOL.

4281562.3

1

5.

AB/AVE

(3/4) 0.13 -0.02 0.89 -0.17 -3.31 -0.40 -0.38

41

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

-8.95%

-3.81%

-8.95%-7.44%

-6.15%

13.88%

19.57%

%C

um

.AB

Re

turn

ICICI BANKCum.AB Return

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

AD-30

AD-10

AD EDED+10

ED+30

Series1

% C

UM

. AB

. RET

UR

N

TIME PERIOD

ICICI BANKPrice Effect

Series1

42

Interpretation

We can see that before the dividend was announced the script generated negative Cum. AB.

Return. But before 10 days of announcement date a sharp rise in price was seen. This might be

due to the inside information leakage. On announcement date again there was a negative

cumulative abnormal return but after that the script generated good positive return. So we can

say that the declaration of news of announcement and effective date generated positive returns

for the company. Also we can infer from the chart that there as positive trends in price of

company. Thus this is the good script to invest in for the investors.

Interpretation

We can see that there is abnormality generated in volume on announcement and effective date. On

announcement date the script generated highest positive cum. AB. Return and on effective date it

generated highest negative cum.AB. Return. However when we compare it with price effects. We

can see that inverse relation is there. Though the share price is rising but the investors are not ready

to purchase at high price. And more of selling has taken place. Due to this negative abnormal

volume is created.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 0.13 -0.02 0.89 -0.17 -3.31 -0.40 -0.38

0.13 -0.02

0.89

-0.17

-3.31

-0.40 -0.38

-4.00

-3.50

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

Rat

io o

f A

B V

olu

me

to

Ave

. V

olu

me

ICICI BANKVolume Effect

43

HDFC Bank



AD-30 TO AD-01 7.61%

AD-10 TO AD-1 3.29%

AD -2.15%

AD+1-ED-1 10.05%

ED 0.44%

ED+1-ED+10 -4.63%

ED+1-ED+30 -7.85%



No

AD-30

TO AD-1

AD-10 TO

AD-1 AD

AD+1 TO

ED-1 ED

ED+1 TO

ED+10

ED+1 TO

ED+30

1 CUM. AB

-

739209.92 -525920.08

-

109142.15 6712620.00 -267248.15

-

1998830.23 -4730018.38

2 DAYS 30.00 10.00 1.00 53.00 1.00 10.00 30.00

3

AVE.DAILY

AB (1/2) -24640.33 -52592.01

-

109142.15 126653.21 -267248.15 -199883.02 -157667.28

4 AVE.VOL. 365010.15

5 AB/AVE (3/4) -0.07 -0.14 -0.30 0.35 -0.73 -0.55 -0.43

44

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

AD-30 TO

AD-01

AD-10 TO AD-1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Series1 7.61% 3.29% -2.15% 10.05% 0.44% -4.63% -7.85%

7.61%

3.29%

-2.15%

10.05%

0.44%

-4.63%

-7.85%

%C

um

.AB

Re

turn

HDFC BANKCum.AB Return

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

AD-

30

AD-

10AD ED

ED+10

ED+30

Series1

%C

um

.AB

. R

etu

rn

Time Period

HDFC BankPrice Effect

Series1

45

Interpretation

We can see from the above chart that there was a negative abnormal return in the script before 30

days of the announcement date. But after that it is generating positive cum abnormal return till

the period nearer to effective date. But in the remaining half period between AD to ED the prices

started declining. After the effective date it again showed a rising trend. This indicates that after

the effective date the investors would have shown more interest in selling of shares. From the

above chart we can interpret that no drastic effect has been seen on announcement date and

effective date.

Interpretation

We can see from the above chart that on announcement date and effective date there was a

negative cumulative abnormal volume generated. During that time price was also rising. But on

the effective date price had rise to maximum level. At that time even the maximum abnormal

volume was also generated. From this we can interpret that investors were waiting for the

effective distribution date. After the distribution of dividend investors started selling of their

shares and the abnormality began to reduce gradually after the effective dividend distribution

date.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 -0.07 -0.14 -0.30 0.32 -0.73 -0.55 -0.43

-0.07-0.14

-0.30

0.32

-0.73

-0.55

-0.43

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

Rat

io o

f A

B V

olu

me

to

Ave

. V

olu

me

HDFC BANKVolume Effect

46

CAPITAL GOODS SECTOR

BHEL Ltd.



AD-30 TO AD-01 0.12%

AD-10 TO AD-1 1.50%

AD 0.01%

AD+1-ED-1 11.45%

ED -1.19%

ED+1-ED+10 -2.48%

ED+1-ED+30 -2.48%



No AD-30 TO

AD-1

AD-10 TO

AD-1 AD

AD+1 TO

ED-1 ED

ED+1 TO

ED+10

ED+1 TO

ED+30

1 CUM. AB -1322302.31 -39453.77 -165658.13 -

10505270.97

-

110721.13 -989480.90

-

3945425.56

2 DAYS 30.00 10.00 1.00 53.00 1.00 10.00 30.00

3 AVE.DAILY

AB (1/2) -44076.74 -3945.38 -165658.13 -198212.66

-

110721.13 -98948.09 -131514.19

4 AVE.VOL. 325027.13

5 AB/AVE

(3/4) -0.14 -0.01 -0.51 -0.61 -0.34 -0.30 -0.40

47

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

AD-30 TO AD-

01

AD-10 TO AD-1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Series1 0.12% 1.50% 0.01% 11.45% -1.19% -2.48% -2.48%

0.12%

1.50%

0.01%

11.45%

-1.19%

-2.48% -2.48%

%C

um

.AB

Re

turn

BHEL LtdCum.AB Return

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

AD-

30

AD-

10AD ED

ED+10

ED+30

Series1

% C

um

.AB

. Re

turn

Time Period

BHEL LTD.Price Effect

Series1

48

Interpretation

We can see from the above chart that before one month of announcement date the script

generated positive cum abnormal return. But during the period between AD 30 to AD 10 there

was negative effect on price. After that price it had again shown a rising trend from the period

between AD 10 to ED 10. This indicates that during this time period investors had shown more

interest in purchasing the script. After the 10 days of effective dividend distribution date again

the negative effect on the price was seen. This indicates that after the effective distribution date

share holders began to sell of the scripts.

Interpretation

We can observe from the above chart that the script generated overall negative cumulative

abnormal return for the share holders. On the AD maximum abnormal volume was there. This is

because of announcement of dividend. Lots of intraday trading would have taken place on this

day. And this might be one of the reasons for huge abnormality in volume on that day. Before the

AD script volume effect tend to react in normal manner. But after the drastic impact on volume

on the AD it again tried to rise and become normal. With the rising prices investors had shown

more interest in selling the shares and there by earn the short term gains.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 -0.14 -0.01 -0.51 -0.34 -0.34 -0.30 -0.40

-0.14

-0.01

-0.51

-0.34 -0.34-0.30

-0.40

-0.60

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

Rat

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BHEL LTD.Volume Effect

49

L & T Ltd.



AD-30 TO AD-01 -0.60%

AD-10 TO AD-1 2.40%

AD 0.84%

AD+1-ED-1 -10.07%

ED 2.05%

ED+1-ED+10 -0.78%

ED+1-ED+30 -8.27%



No

AD-30

TO AD-

1

AD-10

TO AD-

1 AD

AD+1

TO ED-

1 ED

ED+1

TO

ED+10

ED+1

TO

ED+30

1 CUM. AB 7498.84 4652.10 628.61 43904.49 764.56 6655.20 19902.48

2 DAYS 30.00 10.00 1.00 80.00 1.00 10.00 30.00

3 AVE.DAILY AB

(1/2) 249.96 465.21 628.61

548.81

764.56 665.52 663.42

4 AVE.VOL. 713.19

5 AB/AVE (3/4) 0.35 0.65 0.88 0.77 1.07 0.93 0.93

50

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

AD-30 TO

AD-01

AD-10 TO AD-1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Series1 -0.60% 2.40% 0.84% -10.07% 2.05% -0.78% -8.27%

-0.60%

2.40%

0.84%

-10.07%

2.05%

-0.78%

-8.27%

%C

um

.AB

Re

turn

L & T Ltd.Cum.AB Return

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

AD-

30

AD-

10AD ED

ED+10

ED+30

Series1

%C

um

. AB

. R

etu

rn

Time Period

L & T Ltd.Price Effect

Series1

51

Interpretation

We can see from the above chart that before the announcement date script generated positive

cumulative abnormal return. Again during the period from announcement date to effective date

there was a rising trend. But after the effective date the script again began to generate negative

cumulative abnormal return. This indicates that large amount of buying took place during the

period upto the effective date. But after the dividend were distributed the investors started selling

their shares. This created a huge selling pressures and due to this price had come down.

Interpretation

We can see from the above chart that this script generated a good positive cumulative abnormal

return. Before the announcement date it tend to be high. On the effective date it generated

maximum positive cum abnormal volume. This indicates that lots of intra day trading would

have taken place on that day. However in overall sense it creates positive cumulative abnormal

return and it can be considered a good script to invest.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO ED-

1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 0.35 0.65 0.88 0.77 1.07 0.93 0.93

0.35

0.65

0.880.77

1.070.93 0.93

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Rat

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L & T ltdVolume Effect

52

BEML LTD



AD-30 TO AD-01 1.75%

AD-10 TO AD-1 -1.87%

AD 15.79%

AD+1-ED-1 -51.52%

ED -1.41%

ED+1-ED+10 -8.86%

ED+1-ED+30 -20.32%



No

AD-30

TO AD-1

AD-10

TO AD-1 AD

AD+1 TO

ED-1 ED

ED+1 TO

ED+10

ED+1 TO

ED+30

1 CUM. AB 235732.84

-

87812.19

-

26164.86 118530.70

-

11627.86

-

128602.19

-

418740.57

2 DAYS 30.00 10.00 1.00 77.00 1.00 10.00 30.00

3

AVE.DAILY

AB (1/2) 7857.76 -8781.22

-

26164.86 1539.36

-

11627.86 -12860.22 -13958.02

4 AVE.VOL. 46522.86

5

AB/AVE

(3/4) 0.17 -0.19 -0.56 0.03 -0.25 -0.28 -0.30

53

-100.00%

-50.00%

0.00%

50.00%

AD-30 TO AD-01

AD-10 TO

AD-1

AD AD+1-ED

-1

EDED+1-ED+10

ED+1-ED+30

%C

um

. AB

. R

etu

rn

Time Period

BEML LTDCum AB. Return

Series1

-60.00%-50.00%-40.00%-30.00%-20.00%-10.00%

0.00%10.00%20.00%30.00%

AD-

30

AD-

10AD ED

ED+10

ED+30

Series1

%C

um

. AB

. R

etu

rn

Time Period

BEML LTDPrice Effect

Series1

54

Interpretation

From the above chart we can see that before announcement date the script generated positive

cumulative abnormal return. But after announcement date the price showed a negative trend.

Again on effective date it had shown some rise but immediately after that it began to fall down.

This shows that there is positive impact of declaration of announcement date and effective date.

Interpretation

From the above chart we can see that on announcement date huge amount of abnormality was seen

in the script. Before one month of announcement date the script generated positive cum AB return

but again on effective date abnormality was seen in the script and after that it continued in the

entire event period. One have to think before investing in this script because it generates negative

cum AB Return.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 0.17 -0.19 -0.56 0.03 -0.25 -0.28 -0.30

0.17

-0.19-0.56

0.03

-0.25 -0.28 -0.30

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Rat

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BEML LTD.Volume Effect

55

FMCG SECTOR

Colgate Palmolive



AD-30 TO AD-01 8.49%

AD-10 TO AD-1 1.65%

AD 0.64%

AD+1-ED-1 -10.79%

ED -1.11%

ED+1-ED+10 -1.88%

ED+1-ED+30 -4.00%



No

AD-30 TO

AD-1

AD-10

TO AD-1 AD

AD+1 TO

ED-1 ED

ED+1 TO

ED+10

ED+1 TO

ED+30

1 CUM. AB

-

1177893.23

-

187461.72 45185.53

-

1594751.70

-

102838.47

-

822364.72

-

1795212.23

2 DAYS 30.00 10.00 1.00 33.00 1.00 10.00 30.00

3

AVE.DAILY

AB (1/2) -39263.11 -18746.17 45185.53 -48325.81

-

102838.47 -82236.47 -59840.41

4 AVE.VOL. 116674.47

5

AB/AVE

(3/4) -0.34 -0.16 0.39 -0.41 -0.88 -0.70 -0.51

56

-20.00%

-10.00%

0.00%

10.00%8.49%

1.65%0.64%

-10.79%-1.11%-1.88%-4.00%

%C

um

.AB

.Re

turn

Time Period

1 2 3 4 5 6 7

Series1 8.49% 1.65% 0.64% -10.79% -1.11% -1.88% -4.00%

Colgate PamoliveCum. AB. Return

Series1

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

AD-

30

AD-

10AD ED

ED+10

ED+30

Series1

% C

UM

. AB

. R

ETU

RN

TIME PERIOD

Colgate Pamolive Ltd.Price Effect

Series1

57

Interpretation

From the above chart we can see that the script generated negative cumulative abnormal return.

But starting from before ten days of announcement date the script started generating positive

cumulative abnormal return. One of the reason for this might be the leakage of insider

information which might have cause such a price hike. But again starting from before few days

of effective date of dividend it again began to fall downwards. Overall the script generated

negative cumulative abnormal return. So this is not a good script to invest in.

Interpretation

From the above chart we can see that the script generated positive cumulative abnormal return on

announcement date. But again on effective date it again generated a huge negative cumulative

abnormal return. We can say that maximum intraday trading might have taken place on

announcement date with the declaration of news. Overall the script have generated negative

cumulative abnormal return which is not good on the part of the investors. So this is not the good

script to invest.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 -0.34 -0.16 0.39 -0.41 -0.88 -0.70 -0.51

-0.34-0.16

0.39

-0.41

-0.88-0.70

-0.51

-1.00

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

Rat

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. V

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Colgate Pamolive Ltd.Volume Effect

58

HUL Ltd



AD-30 TO AD-01 3.75%

AD-10 TO AD-1 -0.46%

AD -1.78%

AD+1-ED-1 11.52%

ED -0.59%

ED+1-ED+10 6.65%

ED+1-ED+30 18.15%



No

AD-30

TO AD-1

AD-10

TO AD-1 AD

AD+1

TO ED-

1 ED

ED+1 TO

ED+10

ED+1 TO

ED+30

1 CUM. AB

-

1707260.6

2

-

1014373.7

7

142121.8

5

539240.4

6

-

345653.1

5

-

2080499.9

2

-

6339884.2

3

2 DAYS 30.00 10.00 1.00 31.00 1.00 10.00 30.00

3

AVE.DAIL

Y AB (1/2) -56908.69

-

101437.38

142121.8

5 17394.85

-

345653.1

5

-

208049.99

-

211329.47

4 AVE.VOL. 578620.15

5

AB/AVE

(3/4) -0.10 -0.18 0.25 0.03 -0.60 -0.36 -0.37

59

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

AD-30 TO AD-

01

AD-10 TO AD-1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Series1 3.75% -0.46% -1.78% 11.52% -0.59% 6.65% 18.15%

3.75%

-0.46% -1.78%

11.52%

-0.59%

6.65%

18.15%

%C

um

.AB

Re

turn

HUL Ltd.

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

AD-

30

AD-

10AD ED

ED+10

ED+30

Series1

% C

UM

. AB

RET

UR

N

TIME PERIOD

HUL Ltd.Price Effect

Series1

60

Interpretation

From the above chart we can observe that the script generated negative cumulative abnormal

return in the beginning but on announcement date there was a cumulative positive abnormal

return. Till the effective date no such huge abnormal changes were apperent in price effect but

starting from few days of effective date there was a drastic positive change in price effect and it

generated a huge positive cumulative abnormal return for the shareholders. This is good on part

of investors. So it is good script to invest.

Interpretation

We can see from the above chart that the script generated positive cumulative abnormal return on

announcement date. But on effective date a huge negative cumulative abnormal return. But overall

abnormal return generated from the project is negative. Negative abnormal return is not in the

interest of the investors. But the price effect is positive.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 -0.10 -0.18 0.25 0.03 -0.60 -0.36 -0.37

-0.10-0.18

0.25

0.03

-0.60

-0.36 -0.37

-0.70

-0.60

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

Rat

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Ave

. V

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HUL Ltd.Volume Effect

61

Dabur India Ltd



AD-30 TO AD-01 2.39%

AD-10 TO AD-1 1.49%

AD 0.95%

AD+1-ED-1 0.02%

ED 1.12%

ED+1-ED+10 3.76%

ED+1-ED+30 3.64%



No

AD-30 TO

AD-1

AD-10 TO

AD-1 AD

AD+1 TO

ED-1 ED

ED+1 TO

ED+10

ED+1 TO

ED+30

1 CUM. AB 1639089.10 1860744.93 559583.56 11787492.44 58671.56 869090.49 1932615.34

2 DAYS 30.00 10.00 1.00 60.00 1.00 10.00 30.00

3

AVE.DAILY

AB (1/2) 54636.30 186074.49 559583.56 196458.21 58671.56 86909.05 64420.51

4 AVE.VOL. 84381.44

5 AB/AVE (3/4) 0.65 2.21 6.63 2.33 0.70 1.03 0.76

62

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

AD-30 TO AD-01

AD-10 TO AD-1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Series1 2.39% 1.49% 0.95% 0.02% 1.12% 3.76% 3.64%

2.39%

1.49%

0.95%

0.02%

1.12%

3.76%3.64%

%C

um

.AB

Re

turn

Dabur India Ltd.Cum.AB Return

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

AD-

30

AD-

10AD ED

ED+10

ED+30

Series1

% C

um

.AB

.Re

turn

Time Period

Dabur India Ltd.Price Effect

Series1

63

Interpretation

We can see from the above chart that in the beginning the script generated positive cumulative

abnormal return. But in the period between before AD 30 to AD 10 it generated negative

cumulative abnormal return. On announcement date it again fell down till the effective date.

After that it again rose and generated positive cumulative abnormal return. Overall return

generated from the script is positive so it is good script to invest in.

Interpretation

From the above chart we can observe that the script generated maximum cumulative abnormal

return on announcement date. One of the reasons for such a drastic rise in cumulative abnormal

volume might be that lots of intraday trading might have taken place on that day. But after

announcement it began to reduce and get normalized over the event time period. However

overall the script generated positive cumulative abnormal return. This is good on the part of

investors. It is good script to invest in.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 0.65 2.21 6.63 2.33 0.70 1.03 0.76

0.65

2.21

6.63

2.33

0.70 1.03 0.760.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Rat

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Ave

. V

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Dabur India Ltd.Volume Effect

64

IT SECTOR

TCS Ltd



AD-30 TO AD-01 -19.47%

AD-10 TO AD-1 -13.23%

AD -0.92%

AD+1-ED-1 -10.31%

ED -51.54%

ED+1-ED+10 2.97%

ED+1-ED+30 10.37%



No

AD-30

TO AD-1

AD-10

TO AD-1 AD

AD+1 TO

ED-1 ED

ED+1 TO

ED+10

ED+1 TO

ED+30

1 CUM. AB 637265.67 691224.33 768359.67 6188982.67 211483.67 1487268.33 4501477.67

2 DAYS 30.00 10.00 1.00 55.00 1.00 10.00 30.00

3

AVE.DAILY

AB (1/2) 21242.19 69122.43 768359.67 112526.96 211483.67 148726.83 150049.26

4 AVE.VOL. 223657.33

5 AB/AVE (3/4) 0.09 0.31 3.44 0.50 0.95 0.66 0.67

65

-60.00%

-40.00%

-20.00%

0.00%

20.00%

AD-30 TO

AD-01

AD-10 TO

AD-1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Series1 -19.47 -13.23 -0.92% -10.31 -51.54 2.97% 10.37%

-19.47%-13.23%

-0.92%-10.31%

-51.54%

2.97%10.37%

%C

um

.AB

Re

turn

Time Period

TCS

Series1

AD-

30

AD-

10AD ED

ED+10

Series1

-90.00%

-80.00%

-70.00%

-60.00%

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

% C

UM

. AB

RET

UR

N

TIME PERIOD

TCSPrice Effect

Series1

66

Interpretation

We can see that before the Announcement Date of Dividend, there was a big negative

Cumulative Abnormal Return. The return is somewhat better on the Announcement Date. But

the period between the day after the Announcement Date and a day before the Ex-dividend date,

there was a negative return. But on the Ex-dividend date the script reached at the bottom,

generating a negative Cumulative Abnormal Return of 51.54%. This negative return is due to the

heavy selling on the Ex-dividend date. After the ex-dividend date, the script has generated a

return in positive. The return has increased subsequently

Interpretation

We can see that there is a big amount of abnormality in the volume on the Announcement Date.

This could be due to huge selling pressure on the Announcement Date. The Absolute volume

rises gradually before the Announcement Date and reaches on a high peak on the Announcement

Date. After the Announcement of Dividend, the Absolute volume falls down slowly. This

indicates that on the Announcement Date, there must have been some adverse impact on the

investors so that the volume had been shot up. In all, we can see that there exist abnormality in

the volume due to poor return generated by the script.

AD-30 TO AD-1

AD-10 TO AD-1

ADAD+1 TO

ED-1ED

ED+1 TO ED+10

ED+1 TO ED+30

Series1 0.09 0.31 3.44 0.50 0.95 0.66 0.67

0.09 0.31

3.44

0.500.95

0.66 0.670.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Rat

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Ave

. V

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TCSVolume Effect

67

Infosys Ltd.



AD-30 TO AD-01 11.95%

AD-10 TO AD-1 -14.46%

AD 6.03%

AD+1-ED-1 -24.56%

ED -1.95%

ED+1-ED+10 -5.09%

ED+1-ED+30 -8.16%



No

AD-30

TO AD-1

AD-10

TO AD-1 AD

AD+1 TO

ED-1 ED

ED+1 TO

ED+10

ED+1 TO

ED+30

1 CUM. AB

-

237499.68

-

226313.76

-

142094.39

-

343275.42

-

116541.39

-

866006.16

-

1986191.08

2 DAYS 30.00 10.00 1.00 49.00 1.00 10.00 30.00

3

AVE.DAILY

AB (1/2) -7916.66 -22631.38

-

142094.39 -7005.62

-

116541.39 -86600.62 -66206.37

4 AVE.VOL. 225166.39

5 AB/AVE (3/4) -0.04 -0.10 -0.63 -0.03 -0.52 -0.38 -0.29

68

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

AD-30 TO

AD-01

AD-10 TO

AD-1

AD AD+1-ED-1

ED ED+1-ED+10

ED+1-ED+30

Series1 11.95% -14.46 6.03% -24.56 -1.95% -5.09% -8.16%

%C

um

.AB

Documents

Gp on Dividend