Impact of Dividend Announcement on Shareholder Value

Impact of Dividend Announcement on Shareholder ValueDifferent studies suggest that dividend defrayal has no impact on share holder observe in the absence of taxes and market imperfection. Whenever companies throw away surplus earning, they should invest it in projects having positive net deliver value. Another approach is that, the stock value depends upon expected future dividend of that stock. So companies must try to reflect a sustainable growth while announcing dividends. This deal is to examine the impact of dividend announcement on shareholder value. This body of work is based on 17 dividend foundering companies, listed on Karachi billet Exchange. The result shows that investors did not get in from dividend announcement, but lost some value all over a pointedness of 30 mean solar days prior to dividend announcement through 20 days aft(prenominal) ex-dividend date. Results of study is supporting the dividend irreverence hypothesis, that there is no benefit of shareh older in announcement of dividend.Literature ReviewThe ultimate objective of any incorporate entity is to maximize the shareholder value. For the accomplishment of this objective, Finance managers take three kinds of important decisions. First two decisions are investment and financing decisions and the third one is regarding dividend payment to shareholders. Now the question is that whether the payment of dividend increases shareholder value or not. As dividend mean reward that shareholders already proclaim in a corporation, so it is adjust by decline in stock value (Porterfield 1959 and 1965). Generally shareholders select capital gain over currency dividend and the reason is tax pattern. Normally dividend is taxed at high rate as compared to the capital gain. So if we neglect the assumption of tax and other restrictions, then dividend announcement has no impact on shareholders value ( miller and Modigliani, 1961).Investors value a dollar of expected dividend more highly than a dollar of expected capital gain because the dividend yield component is less waste as compared to growth component. (Gorden 1963) If a firm pay the whole part of its earning as dividend then it is most possible that there will be famine of funds for investment which may cause decrease in dividend in the future. Another related approach is that dividend announcement effect the market price of stocks because it carries the breeding of future cash flow of firm (Bhattacharya 1979, Baryosef and Huffman 1986).Shareholders have no benefit in the announcement of dividend. As the shares value falls from thirty days forward announcement of dividend to thirty days after dividend announcement. But these losses are partially compensated by dividend yield in long run (Hamid Uddin, 2003). In some countries like Pakistan, companies are ranked on the basis of dividend payout and some rules by SECP also forced the companies to pay dividend. Considering the benefits of capital gain over cash di vidend this is not a better approach at all (Dr. Ahmad Kaleem Chaudhary Salahuddin).The whole literature review is based on two ideologies. One is that the dividend announcement has a positive relationship with stock prices (Gordon 1963) and the second is that the dividend announcement has a negative relationship with stock prices (Bhattacharya 1979, Baryosef, Huffman 1986 and Hamid Uddin, 2003). The positive relationship between stock prices and dividend announcement is callable to dividend information effect, while the negative relationship is because of tax effect.IntroductionWhenever a company generates profit, it either goes for reinvestment or pay dividend. If a company is going to pay dividend then it takes decision of whether to pay cash dividend or to buy back some of the existing stocks. The question is if a company has opportunity of investment in a project having positive net present value then why should company go for dividend? According to Irrelevance Theory by Mert on Miller and Franco Modigliani (MM) a firms dividend polity has no effect on shareholder value and cost of capital of that firm. The most important thing is the earning of a company nor the dividend policy or reinvestment plans. Assuming there are no taxes and brokerage costs. According to Porterfield (1959 and 1965) paying cash dividend means giving rewards to shareholders that is something they already own in a company. Hence this will offset by declining in the stock value. So paying dividend is not a good approach at all. According to Gorden (1963) investors prefer a dollar of present more than that of expected future one. Thats why companies should go for dividend instead of capital gain.All the theories regarding payment of cash dividend have their own approaches and directions. So the issue of whether paying cash dividend has any impact on shareholder value or not is still unresolved. In countries where dividend income is highly taxable as compared to capital gain, investor s prefer capital gain over cash dividend. There is another face of picture, in countries like Pakistan where companies are ranked match to rate of dividend compensable by them, companies normally prefer to pay cash dividend.In this study we have examined the effect of dividend announcement on shareholders value. To do so, we have selected 17 dividend paying companies from eight different sectors and use the methodology of grocery store Adjusted Abnormal Return (MAAR) and Cumulative Abnormal Return (CAR).MethodologyTo study the impact of dividend announcement on shareholder value, two measurement have been used. (i) Market Adjusted Abnormal Return (MAAR). (ii) Cumulative Abnormal Return (CAR). MAAR indicates the sex act daily percentage price change in the dividend paying stocks compared to the change in average market price. We use KSE 100 price tycoon as proxy of average market price. MAAR is calculated as follows.MAARit = Rit-RmtMAARit it is the market adjusted affected excr ete for security i over time t.Rit is the time t return on secutiry I, calculated as (Pit Pit-1)/Pit-1. Where, Pit is the market completion price of stock I on day t. Pit is the market closing price of stock I on day t-1.Rmt is the time t return on the KSE-100 price index calculated as (It-It-1)/It-1. Where. Iit is the market index on day t. It-1 is the market index on day t-1.The market adjusted abnormal return (MAAR) shows the change in individual stocks value imputable to the dividend announcement. As the percentage change in market index is deducted, the curiosity gives us the portion of the value change, which is specific to that particular stock resulting from its dividend announcement. MAAR is calculated over a period starting to 30 days to +20 days relative to the dividend announcement day (O-day).The second measure used is cumulative abnormal return (CAR), which measures the investor total return over a period starting from before the announcement of dividend to after t he dividend announcement day. We use a 51 day window period starting from -30 day to + 20 day relative to the dividend announcement day (O-day). CAR is computed as follows.CARit = MAARit CARt = CARitWhere CARit is cumulative abnormal return for security I and CARit is cumulative abnormal return for all securities. Similarly MAAR it is market adjusted abnormal return for security I for window period. afterwards that all, the t-test suggested in Brown and Warner (1990, p251-252) is applied to test the significance of CARit and CARt.Sample DescriptionThe sample includes 17 companies, from eight different sectors. All these companies are registered on Karachi Stock Exchange (KSE) and announced dividend between January 2009 and December 2009. Five companies are from banking sector, three from oil and gas, three from cement, two from chemical, one from Pharmaceutical, one from auto assembler, one from textile and again one from telecom sector. Table 1 is showing the names of companies w ith percentage of dividend announced by them in respective year.Empirical findings and analysisMarket Adjusted Abnormal ReturnMAAR shows the change in individual stocks value due to the dividend announcement. As the percentage change in market index is deducted, the remainder gives us the portion of the value change, which is specific to that particular stock resulting from its dividend announcement. In this study, MAAR is calculated over a period starting to 30 days to +20 days relative to the dividend announcement day on zero days.Cumulative Abnormal ReturnCAR which measures the investor total return over a period starting from before the announcement of dividend to after the dividend announcement day.Table 1Sample CompaniesSr. NoCompany NameSector1Habib situate check cambering2Allied Bank LimitedBanking3National Bank of PakistanBanking4United Bank LimitedBanking5Bank AlFalah LimitedBanking6OGDCLOil and Gas7National Refinery LimitedOil and Gas8Pakistan State OilOil and Gas9 gol d CementCement10DG CementCement11Attock CementCement12ICI Pakistan ltd. chemic13Engro Chemical LtdChemical14Highnoon Labortories ltd.Pharmaceutical15Indus Motor Company ltd.Auto Assembler16Nishat Mill ltd.Textile17Pakistan Telecom Co.TelecomTable 2Dividend paid by different sectors in 2009 (Dividend in %age)SectorNo of CompaniesMaximum DividendMinimum DividendAverage DividendBanking5662528.5Oil and Gas31252567Cement340Chemical2656062.5Pharmaceutical1252525Auto Assembler1100100100Textile1202020Telecom1151515Table 3Average MAAR for 51 daysDays relative to Dividend AnnouncementAverage MAAR-300.006995623-29-0.000286981-280.005946367-270.005136643-260.005144653-25-0.004782532-24-0.005356564-23-0.002944433-22-0.01411987-200.004907264-190.00128167-18-0.00011111-17-0.001020032-160.001673402-150.000430173-140.002846477-13-0.001693558-120.002657397-11-0.016735807-10-0.013092062-9-0.005113378-8-0.000797798-7-0.015879282-6-0.005853397-5-0.006602591-4-0.010009299-3-0.002897751-2-0.009621279-10.0 02602260-0.00790893210.0056218322-0.0112607433-0.0011712854-0.00323616750.00045519860.0027136157-0.00248302480.0061077799-0.00598656410-0.00671953711-0.00366146312-0.00255736130.00129841514-0.00302066615-0.01318473616-0.00164779617-0.000315768180.00673391719-0.00976642220-0.000404328Table 4Cumulative Abnormal ReturnCompany NameCARitHabib Bank Limited0.007539Allied Bank Limited-0.23825National Bank of Pakistan-0.13679United Bank Limited-0.56202Bank AlFalah Limited-0.46642OGDCL0.077864National Refinery Limited-0.17524Pakistan State Oil0.368848Lucky Cement-0.14289DG Cement-0.08247Attock Cement-0.2001ICI Pakistan ltd.0.04316Engro Chemical Ltd-0.32989Highnoon Labortories ltd.0.02233Indus Motor Company ltd.-0.31301Nishat Mill ltd.0.09022Pakistan Telecom Co.-0.13362CARt-2.17073