Academic journal article The International Journal of Business and Finance Research

Price and Volume Reactions to Cash Dividend Announcements: Evidence from Taiwan

Academic journal article The International Journal of Business and Finance Research

Price and Volume Reactions to Cash Dividend Announcements: Evidence from Taiwan

Article excerpt

ABSTRACT

Are stock market investors concerned with obtaining abnormal returns by acquiring certain information? This paper studied the effect of ex-dividend date for cash-dividend policy. We try to demonstrate the existence of abnormal returns by examining stock trading situations before and after the ex-dividend date. We find that abnormal returns exist for listed Taiwan firms before and after the ex-dividend date. If an investor buys the stock of a firm who adopts a cash-dividend payout at the closing price 11 days before the ex-dividend date, and sells them at the closing price 10 days after the ex-dividend date, the investor will obtain an average 2.13% abnormal return, regardless of the transaction cost. This paper further analyzes whether firms adopting cash-dividend payouts have different abnormal returns on stock price performance depending on different variables. Yilmaz and Gulay's (2006) method of analyzing abnormal returns of stock prices was adopted. Further studies were undertaken of the three dimensions of cash-dividend payout ratio, stock trading turnover rate, and the firm size.

JEL : G12, G14

KEYWORDS : Cash Dividend, Abnormal Returns, Event Study

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

The Taiwan stock market is one of the most important capital markets in Asia. The Taiwan Stock Exchange was founded in 1962. It has a history of about 50 years, and has developed from manual settlement to fully computerized operations today. The Taiwan stock market not only activates capital movements but also enables firms in Taiwan to acquire funds needed for expansion. The complete stock market was a key factor leading to the economic expansion of Taiwan in the 1960s.

This paper studies the effect of ex-dividend date for cash-dividend policy. We try to prove the existence of abnormal returns by examining stock trading situations before and after the ex-dividend date. If an investor buys the stock of a firm who adopts a cash-dividend payout at the closing price 11 days before the exdividend date, and sells them at the closing price 10 days after the ex-dividend date, the investor will obtain an average of about 2.13% abnormal returns, regardless of the transaction cost. Yilmaz and Gulay (2006) used data from the Istanbul Stock Exchange (ISE) from 1995 to 2003. They discovered that, due to the payout of cash dividends, stock prices before and after ex-dividend dates showed an increasing tendency. The decreasing range of the stock price was smaller than the amount of the dividends paid out, resulting in significant abnormal returns. They find a significant increase in volume before the ex-dividend date, but it tended to maintain stability after the ex-dividend date. We also investigate any difference in the investment behavior of investors with respect to the dividend payout ratio, stock trading turnover rates and firms size in the Taiwan Stock Exchange (TWSE) from 2001 to 2011.

The 11 year period, during which the market size expanded from 531 listed firms, with total market value of NTD (New Taiwan Dollar) 8.19 trillion in 2000, to 811 firms with total market value of NTD 22 trillion by July 2013. The number of listed firms increased by 52.73%, and total market value increased by 168.62%. Listed stock trading in Taiwan was conducted following the provision of Article 150 of Taiwan Stock Exchange Act. The trading of listed negotiable securities is conducted in a centralized security exchange market launched by a stock exchange corporation. The detailed content includes 1.) The opening and the closing of the market: unless otherwise specified. The transaction period of the centralized security exchange market is from 9 a.m. to 1:30 p.m. every Monday to Friday. 2.) Trading types can be classified into three types (a) settlement trading on a regular date; (b) settlement trading on a closing date; and (c) settlement trading on an appointed date. Settlement trading on a regular date should be completed at the second closing date after the deal is agreed. …

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