STOCK PRICES REACTION TO DIVIDEND

ANNOUNCEMENTS OF THE RETAIL COMPANIES LISTED ON

THE SHANGHAI STOCK EXCHANGE

A Research Proposal Presented to

(Enter University Name)

In Partial fulfilment

Of the requirement for the degree of

Master (enter the program details)

By

Adeel Ali
Adeelali15142@gmail.com
Mobile # +923446956696
Contents
Title: Impact of Dividend announcement on share prices in retail sector of China...............3
Chapter 1 Introduction:.........................................................................................................................3
1.1 Research Background:...............................................................................................................3
Research Question:...........................................................................................................................3
1.2 Aims and Research Objectives:...............................................................................................4
1.3 Rationale of this study:...............................................................................................................4
1.4 Literature Review:........................................................................................................................4
1.5 Research Methodology:.............................................................................................................6
Scope of Research:........................................................................................................................6
Choice of Research Strategy:......................................................................................................6
1.6 Research Constraints:................................................................................................................7
1.7 Project Plan:..................................................................................................................................7
Bibliography:...........................................................................................................................................8
Title: Impact of Dividend announcement on share prices in retail sector of China

Chapter 1 Introduction:
Dividend policy is one of the major factor that the shareholders consider when
establishing their investment strategy. It is the financial manager’s goal to maximize
shareholders wealth. This goal can be achieved by paying shareholders fair amount as
a dividend. However, this area remains unresolved. Here the researcher intends to
analyse the relationship between dividend announcement and share price reaction to
announcements in the retail sector of China. The second part states research
background, followed by objectives of the study, research methodology, literature
review, research rational and scope and research constraints of this study.
1.1 Research Background:
Theories of dividend policy being an important aspect of corporate finance has achieved
greater attention from the financial managers, scholars, and academics. Still this area
remains unsolved among many financial scholars. “Dividend is a distribution to
shareholders out of profit or reserves available for this purpose” (Institute of Chartered
Accountant of Ireland). Black (1996) states that “the deeper we look at the dividend
picture, the more it seems like a puzzle, with pieces that just don’t fit together”. Many
studies have been conducted in the past on dividend policy trying to fit the puzzle.
In the presence of perfect capital market with no taxes, dividend announcement does
not affect share prices (Miller and Modigliani). However, in real world markets are not
perfect. Many studies found that there is a strong positive relationship between dividend
announcement and share prices.
Other studies found existence of a negative relationship between dividend
announcement and stock prices. This study will seek to investigate the impact of
dividend announcement on the stock prices of retail sector of China.
Research Question:
What is the relationship between dividend announcement and stock prices of China
retail sector companies listed on the Shanghai Stock Exchange?
1.2 Aims and Research Objectives:
The aim of this study is to determine if there is any change on the stock prices after the
declaration of dividend.
The objectives of this study are:
1) To critically study the relationship between dividend policy and share prices if there
is any?

2) To critically evaluate the role and impact of dividend announcements on share

prices.

3) To critically examining share prices behaviour when there is alteration in dividend

policy.

4) To critically determine whether dividend announcement sends any price sensitive

information to the market.

1.3 Rationale of this study:

In finance world, dividend has been considered as the unanswered puzzle. Although
many studies have been done, issues relating to this area remained complex and
unsolved. There are many empirical and theoretical case studies concerning dividend
and relationship of dividend announcement and stock prices. Many assumptions were
made relating to theoretical readings. Empirical studies on different countries have been
done to test those assumptions. However less focus has been put on long term
performance of the companies. Therefore, the researcher is doing this study to look into
the relationship of dividend announcement on the share prices performance in the short
and long term.
1.4 Literature Review:
Dividend policy talks about “the practice that management follows in making dividend
payout decisions or, in other words, the size and pattern of cash distributions over time
to shareholders” (Lease et al., 2000). Several studies have been carried out on
examining the relationship between the dividend announcements and its impact on
stock prices, yet it remained the inconclusive. Black (1976) called it as a “puzzle” and
Allen et al., (2000) concluded as “Although number of theories have been put forward in
the literature to explain their pervasive presence, dividends remain one of the thorniest
puzzles in corporate finance”.
The two main opposing views on dividend policy are dividend irrelevance theory and
dividend relevance theory. Dividend theory is not only limited to these two views, some
other theories have been developed which added more complexity to the dividend
puzzle. Some popular approaches include the clientele effect, signaling theory, agency
cost hypothesis is all used to describe corporate dividend behaviour.
Miller and Modigliani (1961) claimed that under some impracticable assumptions, in
world of no taxes and transaction cost, dividends are irrelevant to investors. They hold
the view that the value of the companies is calculated by the money produced from the
investment decisions not by dividend payout decision. Studies conducted by Black and
Scholes (1974), Miller and Scholes (1978, 1982), Chen et al. (2002), Adefila et al.
(2004) backed M&M theory. However, the studies carried out by Ball et al. (1979),
Baker et al. (1985) and Baker and Powel (1999) disagreed with M&M view because the
theory was built on impractical assumptions.
Bird in Hand theory of Linter (1956) and Gordon (1959) says that in a world of
uncertainty and inadequate information, dividends are valued inversely to capital gains.
Shareholders favour higher current cash dividends over capital gain despite of paying
higher tax on cash dividends as capital gains are taxed at lower rate, uncertainty of
future capital gains because “A bird in hand is worth more than two in the bush”. Studies
conducted by Bhattacharya (1979), Travlos et al. (2000), Mayers and Frank (2004),
Baker et al. (2002), supports this theory.
Agency cost arises where there is a conflict of interest between the principal and the
agent (Ross et al, 2008). This happens when the management acts for their own
interests rather than for the benefit of shareholders who actually own the company.
Signaling model argues the presence of asymmetric information between managers and
the owners. This theory suggests that when a company announces dividend, it sends
information into the market about its future prospects. Because of inadequate
information, investors are sensitive to the dividend announced by the company and they
would assess the future prospects of the company based on the dividend declared.
Study done by Allen et al. (2000) concluded that the amount of transactions increased
through the ex-dividend date after the announcement increased for institutional and
individual investors.
Clientele theory states that investors have different likings where some might require
capital appreciation while others might fancy high current cash dividends. Pettit (1977)
conducted a study by selecting a sample of 914 individual investors. His result showed
that elderly low-income investors (retired investors and pension fund) tend to favor high
current cash dividends. Whereas young investors required low dividend payouts and
reinvestment of their earnings.
1.5 Research Methodology:
Scope of Research:
In finance world, there are plentiful causes which can affect share prices, explicitly
dividend announcement, macro and micro environment of the country etc. In this study I
am going to investigate the relationship between dividend announcement and its impact
on share prices of companies in Shanghai Stock Exchange. In this research the data
will be collected from 2010 to 2020 year.
Choice of Research Strategy:
Research is a systematic inquiry aimed at providing information to solve problem,
whereas methodology is defined to design the research (Cooper and Emory 1995). For
this study the researcher will use quantitative approach because of its suitability to
examine relationships between dividend declaration and its impact on share prices. This
study focuses to examine the effect of announcement of dividend on the stock prices by
using event study methodology to discover stock prices around dividend announcement
date. To achieve this goal, the market response to dividend declarations will be carefully
examined.
Event study examines the organizations share prices around dividend declaration event.
According to Brown and Warner (1985) an event study defines a method of empirical
research that allows a researcher to examine the effect of an event on the stock prices
like dividend announcement and share prices. In this study, this technique will be used
to investigate the relationship between dividend announcement and the impact it has on
the stock prices.
Information on dividend announcements and any changes in dividend payments can be
gathered from the company annual reports, newspapers and internet databases. To
study the above relationship, the researcher will collect data of retail companies listed
on Shanghai Stock Exchange from the year 2010 to year 2020 that have price sensitive
information around the dividend announcement date. The interim reports, annual
reports, journals, newspapers will be used to conduct research.
1.6 Research Constraints:
This study concentrates on the secondary data of China retail sector companies. The
data set used for examination is narrowed to the window of 10 days before and 10 days
after the dividend declaration date. Major drawback of this study is that it is based on
secondary data, so the validity and reliability of the findings of current research is
arguable. Moreover, lack of primary data also effected the accuracy of the study
findings.
1.7 Project Plan:
This section provides a brief outline of the study, i-e., dividend announcement and its
impact on share prices on China retail sector. This proposal has been divided into
seven sections. Section one elaborates on the background and introduction of the
study. Section two contains objectives and aim of this study.
Section three includes the rationale behind this study. As mentioned above that many
studies have been conducted in the past to examine dividend and share price relation,
but few were conducted in recent past to examine this relation on China retail sector
companies listed on Shanghai Stock Exchange.
Section four focuses on literature review which considers the past studies which have
been conducted to assess the findings. In this section, major dividend policy theories
will be reviewed including the review of past empirical studies conducted to assess the
findings for and against the dividend theories.
Section five includes research methodology, data collection methods, scope of
research, the research strategy which will be used in this study and the methods and
techniques which will be used to collect the data and the tools which will be used to
analyze it.
Section six consists of the problems and drawbacks which are related to the topic of this
study. As this study will be based on secondary data, so the reliability and validity of
outcome of this study is arguable. Lack of primary data will also put an impact on the
accuracy of this study outcome.
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