The Effect of Dividend Signalling on Earnings and Share Prices in South Africa

Show simple item record Mohamed, Nadim 2011-05-19T10:20:31Z 2011-05-19T10:20:31Z 2011-05-19
dc.description MBA - WBS en_US
dc.description.abstract The dividend information signalling hypothesis is one of the more popular theories that address the questions: “Why do companies pay a dividend?” and “Should the dividend have any effect on firm valuation?”. A key premise of the signalling hypothesis is that the dividend contains information regarding management’s insider view of a firm’s future prospects. As a consequence, investors are expected to revise their valuation of a firm upon the release of news of a substantial change in dividend. Furthermore, the dividend change itself is expected to be positively correlated with future changes in firm performance. This study provides evidence regarding the relevance of the signalling hypothesis for the JSE by measuring both of these consequences. A total of 238 dividend change events were collected for the period 1998-2008. The methodology employed improves on previous South African studies by considering the common practice of declaring dividends together with earnings releases. Regression analysis is used to isolate the effect of only the dividend portion of this joint dividend-earnings signal. It was found that the 2-day cumulative abnormal return on the day of a dividend announcement is positively related to the change in dividend from previous year to announcement year. This implies that the market reacts positively to dividend increases and negatively to dividend decreases. However, changes in earnings in the year following the announcement are, at best, weakly correlated with the observed change in dividend. This finding suggests that the dividend information signalling hypothesis is not a good justification for the observed market reaction to dividend events on the JSE. Other theories such as the Agency Theory might be more successful in explaining this market reaction en_US
dc.language.iso en en_US
dc.subject Share dividends en_US
dc.subject Share prices en_US
dc.subject Johannesburg Securities Exchange en_US
dc.title The Effect of Dividend Signalling on Earnings and Share Prices in South Africa en_US
dc.type Thesis en_US

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