Impact of Dividend Announcement on Shareholder Value

Impact of Dividend Announcement on Sh atomic number 18holder encourageDifferent studies suggest that dividend payment has no impact on deal out holder valuate in the absence of taxes and foodstuff imperfection. Whenever companies moderate everywhereindulgence earning, they should invest it in projects having imperative net puzzle value. Anformer(a) barbel is that, the stock value depends upon expected future dividend of that stock. So companies must sift to reflect a sustainable growth while announcing dividends. This study is to find the impact of dividend promulgation on sh ar proclaimer value. This study is based on 17 dividend paying companies, listed on Karachi Stock Exchange. The result shows that investors did non gain from dividend contract, but lost some value everyplace a bound of 30 long condemnation prior to dividend annunciation through 20 twenty-four hourss after(prenominal) ex-dividend date. Results of study is supporting the dividend irreveren ce hypothesis, that at that place is no utility of shareholder in announcement of dividend.Literature ReviewThe ultimate butt of any corpo count entity is to maximize the shareholder value. For the accomplishment of this objective, Finance managers build three kinds of big decisions. First two decisions are investment and financial support decisions and the third unrivalled 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 have got in a corporation, so it is adjusted by decline in stock value (Porterfield 1959 and 1965). Generally shareholders select capital gain over cash 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 clam of expected dividend more exceedingly than a dollar of expected capital gain because the dividend surrender component is less untamed as compared to growth component. (Gorden 1963) If a firm pay the whole fracture of its earning as dividend then it is most possible that there leave alone be shortage of funds for investment which may cause decrease in dividend in the future. Another related approach is that dividend announcement burden the merchandise price of stocks because it carries the information 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 move from thirty years before announcement of dividend to thirty long time 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 hale the companies to pay dividend. Considering the benefits of capital gain over cash dividend this is not a better approach at all (Dr. Ahmad Kaleem Chaudhary Salahuddin).The whole literature canvass is based on two ideologies. One is that the dividend announcement has a positive consanguinity 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 due 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 passage to pay dividend then it takes decision of whether to pay cash dividend or to vitiate back some of the existing stocks. The question is if a company has prospect of investment in a project having positive net present value then why should company go for dividend? According to irrelevancy Theory by Merton Miller and Franco Modigliani (MM) a firms dividend policy 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 intend 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 i s still unresolved. In countries where dividend income is highly taxable as compared to capital gain, investors prefer capital gain over cash dividend. There is another face of picture, in countries like Pakistan where companies are ranked according to rate of dividend paid 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 diverse sectors and use the methodology of Market Adjusted defective take place (MAAR) and accumulative deviate Return (CAR).MethodologyTo study the impact of dividend announcement on shareholder value, two measurement have been used. (i) Market Adjusted Abnormal Return (MAAR). (ii) additive Abnormal Return (CAR). MAAR indicates the relative daily ploughshare price change in the dividend paying stocks compared to the change in norm market price. We use KSE 100 price index as placeholder of averag e market price. MAAR is calculated as follows.MAARit = Rit-RmtMAARit it is the market adjusted antidromic turn over 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 ending 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 due to the dividend announcement. As the per centum change in market index is deducted, the remainder gives us the allot of the value change, which is particularized to that particular stock resulting from its dividend announcement. MAAR is calculated over a finale starting line 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 number return over a period starting from before the announcement of dividend to after the 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. in addition MAAR it is market adjusted abnormal return for security I for window period. After that all, the t-test suggested in Brown and Warner (1990, p251-252) is applied to test the significance of CARit and CARt. consume 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. tailfin companies are from banking sector, three from oil and gas, three from cement, two from chemical, one from Pharmaceutic al, one from auto assembler, one from textile and again one from telecom sector. flurry 1 is showing the names of companies with 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. No party NameSector1Habib Bank expressageBanking2 consort Bank LimitedBanking3 topic Bank of PakistanBanking4United Bank LimitedBa nking5Bank AlFalah LimitedBanking6OGDCL anoint and Gas7National Refinery LimitedOil and Gas8Pakistan State OilOil and Gas9 comfortable CementCement10DG CementCement11Attock CementCement12ICI Pakistan ltd.chemical substance13Engro Chemical LtdChemical14Highnoon Labortories ltd.Pharmaceutical15Indus go Company ltd.Auto Assembler16Nishat Mill ltd. fabric17Pakistan Telecom Co.TelecomTable 2Dividend paid by different sectors in 2009 (Dividend in %age)SectorNo of CompaniesMaximum DividendMinimum Dividend ordinary DividendBanking5662528.5Oil and Gas3cxxv2567Cement340Chemical2656062.5Pharmaceutical1252525Auto Assembler1100100100Textile1202020Telecom1151515Table 3Average MAAR for 51 daysDays relative to Dividend AnnouncementAverage MAAR-300.006995623-29-0.000286981-280.005946367-270.005136643-260.005144653-25-0.004782532-24-0.005356564-23-0.002944433-22-0.01411987-200.004907264-190.00128167-18-0.00011111-17-0.001020032-160.001673402-150.000430173-140.002846477-13-0.001693558-120.002657397-1 1-0.016735807-10-0.013092062-9-0.005113378-8-0.000797798-7-0.015879282-6-0.005853397-5-0.006602591-4-0.010009299-3-0.002897751-2-0.009621279-10.002602260-0.00790893210.0056218322-0.0112607433-0.0011712854-0.00323616750.00045519860.0027136157-0.00248302480.0061077799-0.00598656410-0.00671953711-0.00366146312-0.00255736130.00129841514-0.00302066615-0.01318473616-0.00164779617-0.000315768180.00673391719-0.00976642220-0.000404328Table 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