The effect of dividend announcements on stock prices. Evidence from Helsinki Stock Market

Abstract

Various empirical studies suggest that dividend payments should have no impact on shareholders value in the absence of taxes and market imperfections. In view of this it is suggested that companies should invest excess funds in the positive net present value projects instead of paying them out to the shareholders. Academic literature also suggests that market valuation of stocks depends on the expected future dividends. It is also know that if a company pays out all of its earnings, funds for future investment will decrease and dividend may not increase in the future. Moreover, when dividend is taxable, paying out more cash would increase the shareholders tax liability. Despite these theoretical arguments for not paying dividends, companies often pay cash dividends to their shareholders possibly to signal information about the future earnings prospects. This paper examined market reactions to dividend announcement in the Helsinki Stock Exchange. The empirical results based on 71 samples of dividend paying companies listed on Helsinki Stock Exchange, showed that investors do not gain value from dividend announcement. Indeed shareholders lost about 25 percent of value over a period of 30 days prior to the dividend announcement through to 30 days after the announcement. Overall, the evidence tends to support the dividend irrelevancy hypothesis. It also indicates that dividend payment does not signal any information to the investors, which needs to be further investigated.