If Cash Dividend Announcements Affect The Stock Prices Of Companies Listed On The Palestine Exchange

The weekly performance of IBM stock presented a contestant growth. One highlight of the falling of stock price in the 6th week in the investment period was when IBM presented the 3rd quarter financial report. The investors weren’t satisfied with the profit report which they expected to be better especially when other IT companies were doing well in the 3rd quarter. One mistake I made was that I didn’t follow closely to the financial report of the company; therefore, I missed the peak of the stock price. From this experience, I learned that financial reports and current news are important indicators of the stock price. By following closely to the current event and analyzing the financial report, investors can maximize the profit and also become more familiar to the market.

The research shows that the earnings announcements of firms within an industry can impact the share prices of other firms in the same industry. This effect has been labelled as the ‘information transfer effect’. The ‘information transfer effect’ highlights the belief that share prices react to public information emanating from various sources—including

Baruch Lev and Feng Gu authors of “The End of Accounting and The Path Forward for Investors and Managers” indicate that over the past 110 years, the structure and content of financial reports has not changed, and that the role that these reports play in influencing the decisions of investors has greatly diminished. Lev and Gu make a case that non-transaction events that are not captured by the financial reports such as those disclosed through 8-k filings with the Securities and Exchange Commission (“SEC”) have a greater impact on stock prices, and thus more useful to investors. In addition, they suggest that one of reasons for the decline in usefulness of financial reports stems from the increase of estimates that has made its way into these reports (Lev and Gu 2016).

Since the emergence of the so-called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm distributes it income because the firms’ value is rather determined by their investment policies and the earning power of its assets. They further stated that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.

Some argue that increasing dividend payments increases a firm’s value. Another view claims that high dividend payouts have the opposite effect on a firm’s value; that is, it reduces firm value. The third theoretical approach asserts that dividends should be irrelevant and all effort spent on the dividend decision is wasted. These views are embodied in three theories of dividend policy: high dividends increase share value theory (or the so-called ‘bird-in-the- hand’ argument), low dividends increase share value theory (the tax-preference argument), and the dividend irrelevance hypothesis. Dividend debate is not limited to these three

The dividends that stockholders receive and the value of their stock shares depend on the business’s profit performance. Managers’ jobs depend on living up to the business’s profit goals.

As indicated by the case study S&P 500 index was use as a measure of the total return for the stock market. Our standard deviation of the total return was used as a one measure of the risk of an individual stock. Also betas for individual stocks are determined by simple linear regression. The variables were: total return for the stock as the dependent variable and independent variable is the total return for the stock. Since the descriptive statistics were a lot, only the necessary data was selected (below table.)

more firms exhibit characteristics similar to those of non-dividend-paying firms), Fama and French nonetheless report that once they control for these characteristics, they still find a significant decline in the residual propensity to pay dividends. This evidence poses a further challenge to dividend theories in so far as candidate theories should be able to explain time series changes in the propensity to pay dividends. We extend this literature by examining cross-sectional and time-series evidence on the propensity to pay dividends in several developed financial markets - the United States (U.S.), Canada, the United Kingdom (U.K.), Germany, France, and Japan - over the period 1989 to 2002. Specifically, we examine (i) whether the characteristics of dividend payers and nonpayers are common across countries; (ii) whether these characteristics have changed over time; and (iii) whether firms in other countries exhibit a declining propensity to pay dividends in recent years. In addition, the use of international data allows us to provide further tests of the life cycle, signaling, clientele, and catering explanations by analyzing the concentration of dividend payments as well as the association between Baker and Wurgler’s (2004a,b) dividend premium and the propensity to pay dividends in other countries. Our evidence reveals common determinants of dividends across countries. Like Fama and French (2001), we find

H21: The risk adjusted return of the stock price of the sample of investment firms is significantly negatively affected around the event date as defined by the event period This study uses the standard risk adjusted event study methodology to test the stock market’s response to the Lehman Brothers Bankruptcy on September 15, 2008. Using Yahoo Finance, I found the historical stock prices for the 15 firms and the S&P 500 index during the event study period. The event study period involved 180 days prior to the event and 30 days after, using day 0 as the event date. Using those prices, I calculated the holding period returns for the companies (R) and the corresponding S&P 500 index (Rm) for each day using the formula: Current daily stock return= (current day close price – previous day close price) previous day close price Current daily index return= (S&P current close- S&P previous close) S&P previous close A regression analysis was then performed using the actual daily return of each company (dependent variable) and the corresponding S&P500 index daily return (independent variable) over the pre-event period day -180 to -31 period prior to the event period of day –30 to day +30) to obtain the alpha (the intercept) and the beta (standardized coefficient). Table 1 shows alphas and betas for each firm.

Moreover, the January effect in Canada existed before the introduction of a capital gains tax. Nevertheless, one might argue that U.S. markets are sufficiently influential in world markets that year-end tax selling in the U.S. may drive prices in other markets. On the other hand, studies have demonstrated a January effect in U.S. markets during the period 1877-1916, prior to the introduction of U.S. income taxes. Furthermore, Kihn [1996] presents evidence that municipal bond issues, which are free from federal taxation, experience a significant January effect. Thus, despite the popularity of the tax explanation, there still remain serious doubts regarding its ability to explain the January effect. Some market observers have also suggested that funds will "window dress" at year-end by buying winners (stocks that performed well earlier in the year) and by selling losers.

Signaling theory is applied though dividend policy and continue to be widely accepted, but also having inevitably defects. Firstly, changes in the market for dividend not only can be explained using signaling theory, other theories such as the theory of agency costs can also explain. Second, signaling theory cannot effectively explain the difference between the dividend and forecast for different industries and countries. The most importantly, signaling theory does not explain why the company does not use other method in lower cost but same efficiency to transmit information.

Miller and Modigliani (1961) proposed the dividend irrelevance theory, suggesting that the wealth of the shareholders is not affected by the dividend policy. It is argued that the value of the firm is subjected to the firm’s earnings, which comes from company’s investment policy. The literature proposed that, the dividend does not affect the shareholders’ value in the world without taxes and market imperfections or perfect capital market. Further they argued that dividend and capital gain are two main ways that can contribute profits of the firm to the shareholders. When a firm chooses to distribute its profits as dividends to its shareholders, then the share price will be reduced automatically by the amount of a dividend per share on the ex-dividend date. So, they proposed that in a perfect market, dividend policy does not affect the shareholder’s return. The main assumptions

Myron Gordon’s model explicitly relates the market value of the company to its dividend policy. The determinants of the market value of the share are the perpetual stream of future dividends to be paid, the cost of capital and the expected annual growth rate of the company.

Based on table 1-1, although not all the announced mergers and acquisitions are completed during a year, the percentage of completed mergers and announcements for both years 2011 and 2012 is more than 70% (2011 = 70.32% and 2012 = 72.77%). This is a good indication to a developing country like Malaysia because more than 70% of announced mergers and acquisitions are completed during a year. The increasing value of mergers and acquisitions over the years has motivated this study to examine whether the mergers and acquisitions activities does provide a fair return to the acquirers companies especially in term of the share prices changes. Therefore, it is important to examine whether there is any abnormal returns around the announcement period. However, if the market is efficient, we should expect the impact of mergers and acquisitions only take place on the day of announcement while the other days around the event windows will not generate significance different in abnormal returns.

There are many theoretical and empirical results describing the decisions companies make in this area. At the same time, however, there is no generally accepted model describing payout policy. Moreover, empirical findings are often contradictory or difficult to interpret in light of the theory. In their seminal paper, Miller and Modigliani (1961) showed that under certain assumptions dividends are irrelevant; all that matters is the firm’s investment opportunities. Miller and Modigliani considered the case of perfect capital markets (no transaction costs or tax differentials, no pricing power for any of the participants, no information asymmetries or costs), rational behaviour (more wealth being preferred to less, indifference between cash payments and share value increases) and perfect certainty (future investments and profits are given). In real life, however, people seem to care about dividends. Lintner.s (1956) classical study on dividend policy suggests that dividends represent the primary and active decision variable in most situations. Lintner suggests a model of partial adjustment to a given payout rate.