*We have benefitted from the helpful comments of participants at the 1999 Financial Management Association International Conference, held in Barcelona, Spain. The research assistance of Tasoulla Spyrou, Pantelis Nikolaides, and Philio Demetriou is gratefully acknowledged. This project was partly funded by a European Community MED-CAMPUS program research grant.
(Multinational Finance Journal, 2001, vol. 5, no.2, pp. 87–112) ©Multinational Finance Society, a nonprofit corporation. All rights reserved. 1
Shareholder Wealth Effects of Dividend Policy
Changes in an Emerging Stock Market: The
Case of Cyprus*
ALBA, Greece, and
Cardiff Business School, U.K.
University of Cyprus, Cyprus, and
University of Chicago, U.S.A.
University of Cyprus, Cyprus
This article examines the stock market reaction to announcements of cash dividend increases and bonus issues (stock dividends) in the emerging stock market of Cyprus. Both events elicit significantly positive abnormal returns, in line with evidence from developed stock markets. This study contends that special characteristics of the Cyprus stock market delimit applicability of most traditional explanations for cash and stock dividends in favor of an informationsignaling explanation. The empirical results are generally inconsistent with these contentions (JEL G34).
Keywords: cash dividends, emerging markets, stock dividends
The value-relevance of dividend policy has been in the forefront of financial research since Miller and Modigliani's (1961) pioneering 88 Multinational Finance Journal
work. Prior empirical research, generally focused on firms listed in developed stock markets, suggests that the announcement of dividend increases, either in cash or stock, is associated with significantly positive stock market excess returns. In the case of cash dividends, this evidence is attributed to information-signaling and agency cost effects; in the case of stock dividends it is attributed to information-signalling and "optimal" trading price-range effects. While the focal point in studies performed in developed markets has shifted to explaining the positive wealth effects of dividend increases, the wealth impact of dividend policy changes in emerging markets is currently not well established. Given alternative market microstructure and different information, tax and control environments, the impact of dividend changes is likely to vary across economic environments in different countries.
The purpose of this study is to evaluate the role of cash and stock dividends (bonuses) in an emerging stock market. The Cyprus stock market is an interesting choice of an emerging market in assessing dividend policy changes because it differs from developed markets in several notable dimensions: First, firms listed in this market have, for the most part, highly concentrated ownership structures that may render a standard free-cash-flow explanation for dividend policy changes less likely. Second, over the period under study the Cyprus stock market generally lacked transparency, potentially allowing for exploitation of smaller shareholders by larger ones; such exploitation may be mitigated by dividend increases. Finally, the lack of fixed transaction costs and round-lot restrictions in trading in this market suggests that there is limited use for an optimal trading range for share prices. In this regard, empirical evidence on the value-relevance of dividend increases in this market provides a useful venue for revisiting alternative traditional explanations for dividend policy.
The test results reveal significantly positive stock market returns for firms announcing increases in cash and in stock dividends in line with our expectations. Additional tests, however, are unable to provide convincing evidence about the validity of alternative explanations for dividend policy. These results may be driven by methodological considerations...
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