Cumulative Abnormal Return and Dividend Announcement

Abstract

Dividend changes pass on information about the firm to themarket which makes it complex to understand the dividend policyof the firm. Information content hypothesis explains the theorybehind dividend decisions. However, very few studies haveexamined the effect of adverse economic conditions on
information content hypothesis. The present study investigatesthe role of change in dividend under both adverse and favorablemarket conditions. Using the data of S&P CNX 500 companiesthe study examines the role of dividend yield in explainingcumulative abnormal return over a period of seven years. Using
event methodology, the study investigated whether informationcontent in dividend policy decisions is affected by adverse marketconditions at firm level and market level. The study found thatthere is a signaling effect of cumulative abnormal returnsurrounding the dividend announcement. Testing of the dividend
signaling hypothesis also proved that Indian market is notefficient in its semi -strong form.