Impact of Announcing Dividends on Share Prices of Corporations Listed Dissertation

Impact of Announcing Dividends on Share Prices of Corporations Listed in the Saudi Stock Exchange - Dissertation Example In the past, research tended to confirm the absence of impact of dividend announcements on shareholders’ value on condition that taxes and market imperfections are not present. For this reason, companies would prefer to invest its excess funds (which are not needed for business operations or expansion) in positive net present value projects available to it, in lieu of a dividend payout. It is also generally accepted that market valuation of stocks is dependent upon future earnings – when future earnings are lacklustre, the stock’s market value would go down or remain flat. Should companies pay out all its earnings, therefore, funds that may be reinvested for future productive undertakings are depleted, creating a dampener for new dividend declarations. Also, if dividends were taxable, shareholders may put off the declaration of additional dividends in order for their tax liabilities to be prevented from increasing. Despite these disadvantages to dividend declarat ions, however, companies continue to resort to cash dividends in order to signal information about future earnings (Uddin & Chowdhury, 2008). What is interesting in Saudi Arabian situation is that Saudi Arabia is a non-tax economy, and one would tend to believe that market imperfections are kept to a minimum. The country therefore presents some interesting possibilities towards confirmation of certain principles espoused by Modigliani and Miller, particularly concerning the signalling theory of dividends. This therefore leads to the objective of the study, stated below. 1.1 Objective of the research study The objective of the study is to determine the impact of dividend announcements on the share prices of corporations that are listed in the Saudi Stock Exchange. The purpose is to determine the degree to which informational content is conveyed by unexpected announcements of dividends, as discerned from the stock price changes beyond levels ordinarily expected. This information would be important to all participants in the stock market, including regulators, policy formulators and investors. 1.2 Statement of the problem The study addresses the problem of how market efficiency may be determined through stock price movements in relation to their corresponding market-moving announcements – that is, the release of announcement of dividends other than that already expected by investors. Knowing how this may be determined, the study shall also apply this method in assessing the efficiency of the Saudi Arabian stock market in factoring in the information content of these announcements. 1.3 Main research question The main research question may be stated thus: How efficiently does the announcement of dividends get factored into the prices of stocks trading in the Saudi Arabian stock market? 1.4 Research subquestions The study proposes to answer the main research question by seeking answers to the following subquestion: Q1: How may extraordinary stock price fluctu ations be reliably measured? Q2: By what criteria may unexpected dividend announcements be determined, vis-a-vis expected dividend declarations? Q3: Having distinguished extraordinary stock price fluctuations from regular movements, and unexpected divide