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Article Review:

Effect of Dividend Announcement on Shareholders Value: Evidence from Dhaka Stock Exchange

Submitted to,

Melita Mehjabeen Course Instructor

Submitted by, Omaer Ahmad, Kawsar Ahmad, Zr- 09 Zr- 50

Rafaat Wasik Ahmed, Zr-53 Nasim Ul Haque, Zr-54

Rashed Al Ahmad Tarique, Zr- 61

BBA-16th Batch Institute of Business Administration University of Dhaka

Article Background
The objective of the article was to identify if there was any actual gain by the shareholders from the announcement of dividends by a firm. The Modigliani-Miller Proposition which states that declaring dividends do not actually affect shareholder value was tested on the Dhaka Stock Exchange. The article is causal in nature which tries to find out whether there is any cause and effect relationship between dividends and any realizable gain of the shareholders. Among the findings of the article was that investors, taking into account the initial increase and then the reduction from the ex-dividend price, actually lost value as a result of dividend announcements. A possible cause could be the adverse effect of taxes applicable on dividends. However, some of the lost value is recouped through the dividend yield on shares. Another interesting find from the analysis was that the price gain took place before the actual announcement was made. A suggestion made by the article was that the Securities and Exchange Commission and the Dhaka Stock Exchange should reconsider its criteria for categorization of shares. Currently, they used the consistency of dividends as the yardstick for categorizing shares. As dividend declaration actually is seen to erode shareholders wealth, companies should not be encouraged to declare dividends to remain in the good books. Rather, some other benchmark should be established for such categories.

Review of Methodology
In order to find out the existence of any relationship between dividends and gains by shareholders, the informational impact of announcement of dividends on future prospects of dividends was put under test. 137 firms listed on the Dhaka Stock Exchange (DSE) who declared dividends during the period October 2001 to September 2002 were studied for the purpose of the article. 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 the Cumulative 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 declared dividends during the period from October 2001 to September 2002. This frame was chosen as the period was considered to be politically and economically stable. The general elections have been concluded a while back and so political unrest was considered 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 have some repercussions on the local Stock Exchanges as well. Also, comparisons ought to have been made with a different time-period after the ironing out of the market from the fall out in the 1997 crash. In addition, the second stock exchange in the country, the Chittagong Stock Exchange (CSE), should have been incorporated in order 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 DSE General Index and not the indices of the individual industries to which the firms belonged. Industry-wide trends would have provided a more useful output from the study. However, as the focus of the study was purely academic, the general trend is perhaps not such a drawback either. The Cumulative Abnormal Return and Market Adjusted-Average Return tests were combined with a t-test. The MAAR calculated the fluctuations in the returns from the individual securities by comparing the returns on the security with the market return. This tool is justifiable for gauging the effect of changes in security prices as a 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 good indicator of the shifts in overall market as a result of dividend announcement. The ttest compares the means of the sample with the mean from the market. In order to calculate this value, we do not need to know the standard deviation for the entire population (all the shares in the market) and only 30 sample sizes would be required. As we use 137 sample units, the author should have used a z-test as the

standard deviation of the market is also easy to calculate from the available information from the SEC and DSE. Hence a less that accurate value for the deviation is found and hence a lower chance of identifying statistically significant results. The findings of the article as summarized above do seem to provide insightful information about the alignment of our market to the standard literature preached in institutions. It also concludes with a food for thought of the regulatory bodies that paves way for further research to be conducted on the topic. Another important thing to note, it is not mentioned whether calendar effects, such as Holiday effects, are controlled or not. For example, there is a strong relationship between budget announcement and price change. As a huge no of company announces dividend before or after the budget announcement it should be analyzed carefully.

The article is clear and well written in an easy-to-understand language for nonacademics to understand. It draws on a number of references which allow the reader to further read up on the topic in discussion. However, the article is not without its flaws. Choice of just a single time-frame and a single exchange to make conclusions on the working of the entire market and an important topic such as dividends, a significant part of the stockholders income, would be a tough sell. But as in any good research paper, the article does pave the way for future work on the topic and also provides some well targeted advice to the regulatory authorities.