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Abstract
This study attempts to investigate the stock prices response to dividend announcement of 10 companies listed in Saudi Arabia Financial Markets during the period 2014-2015. 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 twenty days surrounding the announcement day. Research result indicates that the stock prices move upward significantly after dividend announcements. Abnormal return (AR) and cumulative abnormal return (CAR) from the market model are statistically significantly revealed. The results confirm dividend signaling theory as the dividend announcements have significant impact on share prices.
Keywords: dividend announcement, abnormal returns, event study
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1. Introduction
The subject matter of dividend policy remains one of the most controversial issues in corporate finance. For more than half a century, financial economists have engaged in modeling and examining corporate dividend policy. Black (1976) hinted that, "The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that don't fit together". The goal of manager is shareholder wealth maximization which means maximizing the value of the company as measure by the price of common stock. The impact of dividend policy on shareholders wealth is still unsolved. For example, Bernartzi and al. (1997) found that announcement of dividend increases result in positive abnormal returns whereas, the stock price react negatively with announcement of dividend payout decrease.
The purpose of this paper is to observe whether stock price reacts to the announcement of dividend in Saudi Arabia Financial Markets. It investigates whether dividend announcement result in an abnormal return around the announcement day.
2. Literature Review
The stock prices reaction to dividend announcement has attracted much attention among accountants and financial economists. In a pioneering article Modigliani and Miller (1961) argued that dividends policy is irrelevant for the value of the firm in a world without taxes or transaction cost. M&M concluded that given firms optimal investment policy, the firm's choice of dividend policy has no impact on shareholders wealth. In other words, all dividend policies are equivalent. The study, by Abbas (2015) on listed companies in the Damascus Securities Exchange, finds support for the irrelevance...