Stock Market Reaction to Various Dividend Announcements: Which Kind of Dividend Announcement is More Significant?

Abstract

According to the dividend signalling theory, companies take advantage of their announcement of dividend payout policy to signal the market that the firm now has positive future prospects, which will result in changing stock prices. However, there has been no study to date exploring which factor is more significant to its possible dividends payout portfolio. This study focuses on the impact of various dividends payout policies, cash, stock, and even dual dividends, for 5870 Taiwanese companies in the electronics and non-electronics industries listed in the Taiwan Stock Exchange (TSE) during the period from 2000-2010. The study employs event study methodology to examine the effect of a dividend announcement on the stock price within thirty days of the announcement. The results indicate that, on the whole, stock prices will show significant upward movement after dividend announcements. The observed results also explain why firms typically distribute certain dividends in certain ways and why the market might react more positively to stock dividend announcements in emerging markets.