Dividend Announcement and Market Efficiency- An Empirical Study on Service Sector Companies Listed in BSE

Abstract

Dividend Policy is a crucial decision area in the field of corporate finance and informational efficiency of the market has always been an area of vital interest for financial economists. The literature review documented that in imperfect capital markets with information asymmetries, the dividend announcement affects shareholder wealth. However, very few attempts have been made so far to know dividend behavior of Service sector firms in India. The present study is a little research effort in this direction. This study analyses if the announcements of dividend of stocks listed in Bombay Stock Exchange conveys any information. Fulfilling the study, we calculated the average abnormal return by applying the event study methodology. Daily stock data of 193 firms with market model adjustments on 2436 dividend announcements were used for the period 2000 to 2016 to analyze market efficiency. This study reports stock price reactions of banking, health care, IT and realty sector surrounding 21 days event window of the dividend announcement. The results found mixed results with majority of the firms having presence of informational efficiency in Indian service sector. In Realty sectors stock price reaction to dividend announcement is not statistically significant whereas for other three sectors, Banking, IT and Healthcare, it is significant.