SISTEMA DE FRENOS

To date, the research on the dividend policy and stock market reaction to dividend announcements show a bias in favour of firms in countries with developed capital markets, as most of the research on dividend policy were conducted in these countries. The current section reviews the few studies conducted on this topic in the emerging markets. The review of studies in other emerging markets facilitates a greater level of comparability with the results of the present study because of the relative homogeneity of the markets and the similar economic/institutional environment which they share with Nigeria.

3.7.1 Dividend Announcements and Share Prices

Examination of share price reaction to dividend announcements has also been extended to emerging markets, albeit relatively few. Bandara (2001) examined the information content

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of dividend announcements using data from the 37 companies that made 123 dividend announcements at the Colombo Stock Exchange (CSE) of Sri Lanka during the period 1993 to 1998. The results of the study support the notion that stock prices reacts to dividend announcements. In particular, the author documented that the market reacted positively to the announcement of dividend increase and negatively to the announcement of dividend decrease. For the dividend-no-change announcements, the author documented no significant reaction. In a similar vein, Travlos et al. (2001) examined the stock price reaction to the announcements of cash dividends in Cyprus and documented positive abnormal returns on the dividend announcement date. The authors also recommended that firms operating in emerging markets should adopt a payout policy that suits the characteristics of their stock market, such as market microstructure and tax treatment of dividends.

Despite this weight of evidence, a study by Chen et al. (2002) on the share price reaction to the announcement of concurrent earnings, cash dividends, and stock dividends in the Chinese stock market did not find evidence in support of a share price reaction to dividend announcements. Specifically, the authors documented that cash dividends have no clear association with stock returns in the sample companies studied. Their results suggest that the variability of dividends diminishes their information content. In a similar vein, Akbar and Baig (2010) examined the reaction of stock prices to dividend announcements in Pakistan during the period 1 July 2004 to 29 June 2007 and reported negligible abnormal returns for cash dividend announcements. However, a recent study by Hu Zuguang and Ahmed (2010) covering the period January 2005 to December 2009 did uncover a significant share price reaction to dividend announcements in Shanghai Stock Exchange. In particular, the authors reported positive abnormal returns for the dividend-increasing companies during the dividend announcement date. However, for the dividend-decreasing companies, the authors found that the market did not experience any negative abnormal returns suggesting that investors in the Shanghai stock market do not regard dividend decrease as a negative signal. The authors also found that significantly large dividend increase announcement has much higher effect on the value of abnormal returns suggesting that size of the dividend increase was an important consideration to the investors.

Dasilas and Leventis (2011) examined the market reaction to cash dividend announcements employing data from the Athens Stock Exchange (ASE) for the period 2000-2004.

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Specifically, the authors investigated both the stock price and trading volume reaction to dividend announcements. The result of their study is similar to those reported by Bandara (2001) and supports the notion that share price reacts to dividend announcements. The authors documented a statistically significant market reaction to dividend change announcements, which lend credence to the information content hypothesis of dividend signalling. In particular, the authors reported that dividend increases induced a significant positive stock price reaction, whereas dividend decreases brought about a significant negative price reaction for the sample companies. Their results also show that the trading volume move in the same direction as the dividend change signals.

Other researchers have also investigated the market reaction to dividend announcements using emerging markets data and have documented results that support the information content hypothesis of dividend signalling (Aamir and Ali Shah, 2011; Al-Yahyaee et al., 2011; Sharma, 2011). For example, Al-Yahyaee et al. (2011) examined the share price reactions to cash dividend announcements, using data from the universe of Omani companies announcing cash dividends from January 1, 1997 to August 31, 2005. Specifically, the authors examined the tax-based signalling hypothesis, which suggests that dividends would not be informative if not for the higher taxes on dividends relative to capital gains. The authors reported that the market reacts strongly to the announcement of changes in cash dividends; in particular, dividend increases resulted in positive price reaction, while dividend decreases resulted in negative price reactions for the sample companies studied. The authors concluded that despite the fact that Omani’s stock market is young and investors have limited knowledge and expertise, the dividend announcements are used by investors as information-signals.

Very recently, Dharmarathne (2013) examined the stock market reaction to dividend announcements and information efficiency in the Sri Lankan stock market using a sample of 61 companies that made 137 dividend announcements during the period 1999-2005. The author divided the sample into three groups based on their dividend-change announcements. The author documented that share prices react to dividend announcements in Sri Lanka, implying that dividends contain price-sensitive information. Specifically, the author documented that the average abnormal returns for both the dividend-increasing and dividend-decreasing companies were positive during the

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announcement date, suggesting that the stock market reacts positively when a dividend decrease announcements are made in Sri Lankan stock market. Finally, the author also found evidence which suggests that the market reacts earlier than the actual announcement of dividend changes, suggesting that there is information leakage in the market.

3.7.2 Managerial Views about Dividends in Emerging Markets

Very few studies have analysed the dividend behaviour of management in an emerging market context. Glen et al. (1995) were the first to study the dividend policy decisions of firms in emerging markets. The authors found that the payout ratios in developing countries are typically much lower than that of developed countries, and that firms in emerging markets exhibit high volatility of dividends over time. The authors also reported that shareholders and governments exert significant influence on dividend policy and that dividends have little signalling content.

Chazi et al. (2011) examined the field practice of dividend policy in an emerging market in the UAE, using both questionnaires and field interviews. Their results provide support for the proposition that dividend policy is conservative. Specifically, the authors reported that companies are reluctant to reduce dividends and that they typically determine their payout policy based on current year’s earnings and the past dividend payments. The authors also found that ‘dividends in UAE are considered by managers as a residual cash flow, and are determined after investment decisions are made’ (Chazi et al., 2011, p.257). With regards to the determinants of dividend policy in the UAE, the authors found that taxes are immaterial; that institutional investors are expected to play a role in disciplining managers, and that dividend may play a disciplinary role in controlling agency conflicts. Finally, the authors found support for the signalling function of dividend policy.

Khan et al. (2011) investigated the managerial views about dividend policy in Pakistan, using interviews. Their results indicate that despite differences in institutional environment between emerging and developed markets, the dividend-setting process in Pakistan were similar in many respects to those in the US and other developed capital markets. In particular, the authors reported that Pakistani companies focus on current earnings and liquidity when deciding on a disbursement level. However, the authors suggested that past dividends do not influence the current dividend levels in Pakistan and that companies were

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not reluctant to announce news of a dividend cut. The next section deals with the few studies conducted on dividend policy using Nigerian data.