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Effect of Dividend Announcement on Shareholders’ Value - Article Review

Effect of Dividend Announcement on Shareholders’ Value - Article Review

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Published by: Rashed Al Ahmad Tarique on Jun 19, 2011
Copyright:Attribution Non-commercial


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Article Review:
Effect of Dividend Announcement onShareholders’ Value:Evidence from Dhaka Stock Exchange
Submitted to,
Melita MehjabeenCourse Instructor
Submitted by,
Omaer Ahmad, Zr- 09Kawsar Ahmad, Zr- 50Rafaat Wasik Ahmed, Zr-53Nasim Ul Haque, Zr-54Rashed Al Ahmad Tarique, Zr- 61
BatchInstitute of Business AdministrationUniversity of Dhaka
Article Background
 The objective of the article was to identify if there was any actual gain by theshareholders from the announcement of dividends by a firm. The Modigliani-MillerProposition which states that declaring dividends do not actually affect shareholdervalue was tested on the Dhaka Stock Exchange. The article is causal in nature which tries to find out whether there is any cause andeffect relationship between dividends and any realizable gain of the shareholders.Among the findings of the article was that investors, taking into account the initialincrease and then the reduction from the ex-dividend price, actually lost value as aresult of dividend announcements. A possible cause could be the adverse effect of taxes applicable on dividends. However, some of the lost value is recouped throughthe dividend yield on shares. Another interesting find from the analysis was that theprice gain took place before the actual announcement was made.A suggestion made by the article was that the Securities and ExchangeCommission and the Dhaka Stock Exchange should reconsider its criteria forcategorization of shares. Currently, they used the consistency of dividends as theyardstick for categorizing shares. As dividend declaration actually is seen to erodeshareholders’ wealth, companies should not be encouraged to declare dividends toremain in the good books. Rather, some other benchmark should be established forsuch categories.
Review of Methodology
In order to find out the existence of any relationship between dividends and gainsby shareholders, the informational impact of announcement of dividends on futureprospects of dividends was put under test.137 firms listed on the Dhaka Stock Exchange (DSE) who declared dividends duringthe period October 2001 to September 2002 were studied for the purpose of thearticle. DSE all-share price index was used as the proxy of average market price. The market prices of the share prices from 30 days before dividend announcement
and 30 days after were analyzed. The tools used for the analysis were theCumulative Abnormal Returns, Market Adjusted – Abnormal Returns and t-test of the returns from stocks.
Commentary of the Article
 The sample frame for the article included the 137 enlisted companies that declareddividends during the period from October 2001 to September 2002. This frame waschosen as the period was considered to be politically and economically stable. Thegeneral elections have been concluded a while back and so political unrest wasconsidered to be low. However, the author failed to incorporate the after effects of the September 11, 2001 bombings that shook the global economy. These did havesome repercussions on the local Stock Exchanges as well. Also, comparisons oughtto have been made with a different time-period after the ironing out of the marketfrom the fall out in the 1997 crash. In addition, the second stock exchange in thecountry, the Chittagong Stock Exchange (CSE), should have been incorporated inorder to find the impact in the overall securities markets in Bangladesh. The comparisons in calculations of the CAR and the MARR were made with the DSEGeneral Index and not the indices of the individual industries to which the firmsbelonged. Industry-wide trends would have provided a more useful output from thestudy. However, as the focus of the study was purely academic, the general trend isperhaps not such a drawback either. The Cumulative Abnormal Return and Market Adjusted-Average Return tests werecombined with a t-test. The MAAR calculated the fluctuations in the returns from theindividual securities by comparing the returns on the security with the marketreturn. This tool is justifiable for gauging the effect of changes in security prices asa result of a particular event that affects prices. The CAR calculates a summation of all the MAARs in the market over the period of the study. Again, this is a goodindicator of the shifts in overall market as a result of dividend announcement. The t-test compares the means of the sample with the mean from the market. In order tocalculate this value, we do not need to know the standard deviation for the entirepopulation (all the shares in the market) and only 30 sample sizes would berequired. As we use 137 sample units, the author should have used a z-test as the

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