Price Formation around Dividend Announcement Date: Empirical Evidence in Indonesian Stock Exchange

Abstract

Purpose: This research aims to prove that there is a change in abnormal return around the dividend announcement date. Based on differences in the interests of rational and irrational investors related to the dividend announcement and subsequent event, the authors propose two research questions: first, whether there is an abnormal return around the dividend announcement date; second, whether price changes around that event. Design/Methodology/Approach: The time span of the study was five days before and five days after the announcement date of 15 companies which announced dividends from 2007-2012. To answer the first question, we used the t-test and to answer the second question, we employ the coefficient of multiple regression equations, namely the bid and ask price. Findings: The results of this study indicate significant abnormal returns around the dividend announcement date. The price formation is not influenced by dividend announcement, but it was influenced by the demand and the bid prices which implies that there is an effort of investors to maximize capital gains by selling and buying certain stocks. Practical Implications: Dividend announcement date still contains information for investors, because the possibility of surprise factor has been reduced. Investors have already received the rumors about the dividend announcement date and the event has received financial reports, which may have been used by investors in predicting the stock price. Originality/Value: Our study is the first to link bid and ask price to the price formation process before and after the dividend announcement date. The results of this test have answered the question that there are price changes during the dividend distribution event for testing individual levels of the company.

Dividend announcement effect analysis before and during the COVID-19 pandemic in the Indonesia Stock Exchange

“…Therefore, Indonesian Stock Exchange provides a sluggish response toward the event. This result is in line with the research by Mujib and Candraningrat ( 2021 ) and Frensidy et al ( 2019 ) who have also found insignificant negative abnormal returns toward the COVID-19 pandemic, as well as Anwar et al ( 2017 ) who discovered that during a recession period of 2003–2013, the returns of the stock decreased significantly compared to the normal condition.…”

“…The result obtained is not aligned with the study from Frensidy et al ( 2019 ) who has analyzed the dividend effect in Indonesia Stock Exchange from 2007 to 2012 and discovered a significant abnormal return around the dividend announcement date. Frensidy et al ( 2019 ) has also mentioned that significant abnormal returns indicate an active response from the market to gain returns from the event. Thus, it confirms that the stock market manifests weak and delayed response toward the event.…”

“…According to a theory called Dividend Signaling Theory, a dividend becomes one of the ways to give a signal to the shareholders regarding the company’s condition since there is asymmetric information between the management and the shareholders (Bhattacharya 1979 ). Ozo and Arun ( 2019 ) as well as Frensidy et al ( 2019 ) have discovered a significant abnormal return around the dividend announcement date. Thus, the Dividend Signaling Theory is confirmed to still exist in the recent era.…”

How Does Stock Market React to Dividend Announcement? An Empirical Evidence from Tanzania Listed Firms

“…Consequently, the shareholders might as well study the company's condition more thoroughly to make investment decisions. Frensidy et al (2019) have found a significant abnormal return around the dividend announcement date as guided by the power of information attached into dividend announcement. This phenomenon lies on the foundation of two schools of thought namely dividend relevance and dividend irrelevance.…”