(Impact Factor- 5.276) EVENT-STUDY OF DIVIDEND ANNOUNCEMENTS BY SELECTED PUBLICSECTOR BANKS OF INDIA BISWAJIT KUMAR RESEARCH SCHOLAR, MONAD UNIVERSITY, HAPUR (U.P) ABSTRACT The Efficient market hypothesis can be best summarised in the words The expected value of abnormal returns is zero, but chance generates deviations from zero (anomalies) in both directions Fama (1998)The present event study supports the semi-strong form of market efficiency in case of dividend announcements by public sector banks. Key words: Dividend Announcements, Semi-Strong Form of Efficient Market Hypothesis, Event Studies, Abnormal Returns, Pre and Post Announcement Periods, Charting INTRODUCTION The Efficient Market Hypothesis (EMH) proposed byfama (1965) in the Efficient Market Hypothesis (EMH) proposesthat the market efficiency may be: Weak Semi-strong, and Strong The weak form of market efficiency proposes that current stock prices reflect all past information. It also suggests that changes in stock prices reflect all past information. It also suggests that changes in stock prices are random and no investment strategy that is based on past information can yield above average returns to the investor. This implies that technical analysis will not be rewarded with above average returns. The semi-strong form of market efficiency (informational efficiency) proposes that current stock prices incorporate material public information and changes in stock prices will only lead to unexpected public information. This suggests that fundamental analysis will not be rewarded with above average returns. Finally, the strong form of market efficiency proposes that insider trading will not be rewarded as current stock prices incorporate all material non-public information http://www.ijmr.net.in email id- irjmss@gmail.com Page 248
(Impact Factor- 5.276) The semi-strong form of market efficiency has mostly been investigated using event study methodology. Information disclosures related to dividends and earnings announcements, macroeconomic variables, stock repurchase announcements, and merger and acquisitions, etc., have been investigated in different studies to test the semi-strong form market efficiency. OBJECTIVES OF THE STUDY The study aims to investigate the semi-strong form of market efficiency by examining the reaction of stock prices to dividend announcements using event study methodology to explore stock returns around the dividend announcement date. The announcement concern only cash dividends. RESEARCH METHODOLOGY The study takes an event study approach to test the stock price responses to dividend announcement. The date of dividend announcement is defined as day 0 or event day. An estimation window of 7 days and event window of 250 days had been included. Akbar & Baig (2010) examine stock price reaction to dividend announcements by computing the abnormal returns using the Market Adjusted Model. The model defines abnormal returns as the excess return on a security, adjusted for the return on the market index over the same period of time. The equation for market adjusted abnormal returns is as follows: AR i, t Ri, t Rm, t Where: AR i, t is the market adjusted abnormal return on security i over time t. R m, t is the time t return on the market index. R i, t is the time t return (including dividends) on security i. The literature of event study analysis proposes other models to estimate the abnormal returns, such as the Market Model. Nonetheless, several empirical studies show that Market Adjusted Model http://www.ijmr.net.in email id- irjmss@gmail.com Page 249
(Impact Factor- 5.276) provides similar results to those of more sophisticated models Brown & Warner (1985). In addition the Market Adjusted Model has other advantages such as simplicity in implementation and interpretation. CAR t AAR 4 5 t AAR AR t i, t N Where Nis the number of events. SAMPLE AND DATA The sample for the study comprises of nineteen dividend paying public sector banks. The period of study involves data from the year 2015. ANALYSIS & INTERPRETATION The abnormal return of companies is calculated through Sharpe Model. AARs (average abnormal returns) of the portfolio are shown in table 1 below. AVERAGE ABNORMAL RETURNS ACROSS FIRMS Name Estimate Error t.value p.value sig 1 Allahabad Bank 0.0643 0.055 1.17 0.242 2 Andhra Bank -0.0087 0.0483-0.18 0.8572 3 Bank of Baroda -0.0129 0.0466-0.2767 0.782 4 Bank of India -0.1629 0.0516-3.1599 0.0016 *** 5 Canara Bank -0.0252 0.0593-0.425 0.6708 6 Central Bank of India 0.0362 0.0476 0.7602 0.4471 7 Corporation Bank -0.0077 0.0379-0.2034 0.8389 8 Dena Bank -0.116 0.046-2.5243 0.0116 ** 9 Indian Bank -0.0378 0.0562-0.6723 0.5014 10 Indian Overseas Bank -0.0921 0.0471-1.9559 0.0505 * http://www.ijmr.net.in email id- irjmss@gmail.com Page 250
(Impact Factor- 5.276) 11 Oriental Bank of Commerce 0.0797 0.0695 1.1461 0.2517 12 Punjab & Sind Bank 0.069 0.0494 1.3963 0.1626 13 Punjab National Bank 0.0251 0.0503 0.4994 0.6175 14 State Bank of India -0.096 0.041-2.3412 0.0192 ** 15 Syndicate Bank -0.0274 0.0503-0.5451 0.5857 16 UCO Bank -0.0525 0.0538-0.9756 0.3292 17 Union Bank of India -0.0695 0.0654-1.0626 0.288 18 United Bank of India 0.0676 0.0605 1.1171 0.264 19 Vijaya Bank -0.0636 0.0432-1.4737 0.1406 20 GNT -0.0227 0.012-1.8945 0.0582 * Table 1 CONCLUSION The study supports the semi-strong from of market efficiency. Out of the nineteen banks under study, five namely, Dena Bank, Bank of Baroda, Indian Overseas Bank, State Bank of India and Syndicate Bank show increasing trend in the average cumulative return after the announcement of dividend payment. PLOTS OF THE AVERAGE CUMULATIVE ABNORNMAL RETURNS (%) Allahabad Bank Andhra Bank Bank of Baroda http://www.ijmr.net.in email id- irjmss@gmail.com Page 251
(Impact Factor- 5.276) Bank of India Canara Bank Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Punjab National Bank UCO Bank Oriental Bank of Commerce Vijaya Bank State Bank of India Union Bank of India http://www.ijmr.net.in email id- irjmss@gmail.com Page 252
(Impact Factor- 5.276) Aggregate Punjab & Sind Bank Syndicate Bank REFERENCES Akbar, Muhammad & Humayun Habib Baig. 2010. Reaction of stock prices to dividend announcements and market efficiency in Pakistan. The Lahore Journal of Economics 15(1):103 125. Brown, Stephen J & Jerold B Warner. 1985. Using daily stock returns: The case of event studies. Journal of financial economics 14(1):3 31. Fama, Eugene F. 1965. The behavior of stock-market prices. Journal of business pp. 34 105. Fama, Eugene F. 1998. Market efficiency, long-term returns, and behavioral finance. Journal of financial economics 49(3):283 306. http://www.ijmr.net.in email id- irjmss@gmail.com Page 253