Stock Prices Reaction to Dividend Announcements: A Study on Listed Companies in the Damascus Securities Exchange

Abstract

According to the signaling theory, dividend announcements are usually considered as a signal to the investors, about firm's future performance, that results in stock prices changes. This study attempts to investigate the stock prices response to dividend announcement in the Damascus Securities Exchange. The purpose of the study is to identify whether there are any significant abnormal returns around the public announcement of dividend. An event study methodology is used for an event window of forty days surrounding the announcement day. Research results indicate that most average abnormal returns are statistically insignificant, whereas the cumulative average abnormal returns are statistically significant for the whole event window. The downward drift of the cumulative average abnormal returns six days after the announcement suggests that prices don't adjust immediately to dividend information. The stock reactions appear within post-event window gradually in response to the dividends announcement. 1. Introduction It is generally accepted that a dividend announcement affect the stock price around the announcement day. Most existing theories imply that dividend announcements convey information and, consequently, affect share prices. In an informational inefficient market, managers have more information than investors regarding the future prospects of the firm, therefore, dividend announcement may serve as a signal to communicate this information and thereby reducing the level of information asymmetry; this is known as dividend signaling hypothesis. However, it is probable that the stock prices don't adjust in an efficient manner to the new dividend information. Based on the dividend announcement, when information takes a period of time to be incorporated into the stock price, investor can make use of this inefficiency and earn abnormal return, which continue to exist over a period of time after the announcement. Studies that investigate the price effect of dividend announcements are mainly based on developed capital markets data. There are very limited studies on this issue in a nascent market such as Damascus Securities Exchange (DSE). The current research provides evidence on the relation between stock returns and dividend announcements by companies during the period from 2010 to 2014. It investigates whether dividend announcements result in an abnormal return around the announcement day in the DSE. Since Damascus Securities Exchange is inefficient market (Al-Ahmad, 2012; Abbas, 2014) the stock prices behavior wouldn't reflect fully and immediately all published information. Therefore, there will be an opportunity for the investors to earn consistently abnormal returns over a period of time after the announcement.