An Empirical Analysis of the Volatile Stock Behavior at the event of Dividend Announcement: Evidence from Indian Capital Market (National Stock Exchange of India)

Topics: Stock market, Stock, Dividend Pages: 26 (7093 words) Published: April 14, 2014
An Empirical Analysis of the Volatile Stock Behavior at the event of Dividend Announcement: Evidence from Indian Capital Market (National Stock Exchange of India)

This paper analyses the impact of dividend announcement on company stock returns for 25 companies listed in five different indices on National Stock Exchange (NSE) i.e. Indian Capital Market. The study has been conducted with the help of event study methodology for a window of 31 days in total. The study gives a comparative analysis of the stock returns behavior for 15 days before and 15 days after dividend announcement and also of the stock behavior with respect to the Market Index versus the Sector Index for all the companies. The paper has been developed with a view to provide an evidence of stock volatility around the dividend announcement day in the Indian Capital Market i.e. National Stock Exchange of India.

Dividend Checks are appreciated more than capital gains and provide an automatic control device on the spending levels.

Thaler, 1980

The announcement of dividend by a company for its shareholders is an event that creates a lot of volatility in the company s stock returns. Investors can make money from shares and stocks in two ways. First being Capital Appreciation with time and second the dividend paid by the company for holding the stocks. Dividend is the portion of the company s profits paid to its shareholders. When a company makes profits after accounting for all the expenses and losses, the company has two options to use those profits. Either they can choose to re-employ the profits in the business or pay it to its shareholders as dividends. The companies have to make a choice between the two and take the decision that benefits the business as well as its shareholders.

Declaration of dividend by companies leads to volatility in the stock prices as dividend attracts the investors to make a return on the money invested in the stock. Dividend Announcement is a Corporate Announcement i.e. the information provided by the company officials to the stock markets. Such announcements are usually communicated by company officials along with company s financials at the end of the financial year. If the announced dividend meets the expectation of the market then the investors and traders react positively towards the stock and if the dividend expectations are not met then the market reacts in a negative way for that company s stock. There has been a lot of research carried out on the dividend puzzle and its impact on the stock behavior in the stock market. But the empirical studies have shown mixed evidence using the data from US, UK and some Asian stock markets. The reactions of investors and traders in different stock markets have presented mixed results to the announcement of dividends.

This paper attempts to analyze the impact of dividend announcement on company s stock prices for 25 companies that are listed in the Indian Stock Market i.e. National Stock Exchange (NSE) of India. In oorder to undertake this study 5 companies each from 5 different sectoral indices under NSE were selected and the companies were chosen on the basis of the daily trade volumes both in terms of volume as well as value.

The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country. NSE was incorporated in November 1992 and by October 1995 it became the largest stock exchange of the country. NSE was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The Exchange has brought about unparalleled transparency, speed and efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures. The National Stock Exchange (NSE) operates a nation-wide, electronic market, offering trading in Capital...

References: August, 2008, Leeds University Business School.
Companies in India, APJRBM Volume 1, Issue 3 (December, 2010, pp. 178-189.
Methodology, Vilakshan, XIMB Journal of Management; September, 2011 Pp 23-32.
Theories and Empirical Evidence, International Bulletin of Business Administration Issue 9
(2010), pp
Franco Azzopardi, Dividend Irrelevance and the Clientele Effect, University Of Leicester, 2004.
Black, Fischer and winter (1976), "The Dividend Puzzle , the Journal of Portfolio Management,
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