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