Stock Price Reactions to Dividend Announcements

Stock market efficiency has been of considerable importance in finance literature. Three forms of efficient market hypothesis (EMH) have been examined by researchers and analysts. This paper examines the stock price reactions to dividends, one of the publicly available information, to test the semi-strong form of EMH. The study is based on the dividend announcements of 149 companies which are part of the BSE-200 Index that announced dividends for the financial year 2002. To test the stock price reactions, the expected returns are found out by regressing the daily returns of companies and market index for the period January 1998 up to the relevant date applicable to companies. Based on these results, abnormal returns, average abnormal returns (AAR) and cumulative average abnormal returns (CAAR) are worked out for 29 days prior to and 30 days after the dividend announcement (event) date. The analysis of the results shows that AARs do not approximate to zero and CAARs show wide fluctuations indicating that abnormal returns can be earned several days after the event day. CAARs show that abnormal returns can be earned 24 days after the event day. From this we conclude that Indian market is not efficient in the semi-strong form.