final project report on DIVEDEND POLICY @ MBA

Introduction
Dividends are payments made by a corporation to its shareholder members. It
is the portion of corporate profits paid out to stockholders. When a
corporation earns a profit or surplus, that money can be put to two uses:
it can either be re-invested in the business (called retained earnings), or
it can be paid to the shareholders as a dividend. Many corporations retain
a portion of their earnings and pay the remainder as a dividend.
For a joint stock company, a dividend is allocated as a fixed amount per
share. Therefore, a shareholder receives a dividend in proportion to their
shareholding. For the joint stock company, paying dividends is not an
expense; rather, it is the division of an asset among shareholders. Public
companies usually pay dividends on a fixed schedule, but may declare a
dividend at any time, sometimes called a special dividend to distinguish it
from a regular one.
Cooperatives, on the other hand, allocate dividends according to members'
activity, so their dividends are often considered to be a pre-tax expense.
Dividends are usually settled on a cash basis, store credits (common among
retail consumers' cooperatives) and shares in the company (either newly-
created shares or existing shares bought in the market.) Further, many
public companies offer dividend reinvestment plans, which automatically use
the cash dividend to purchase additional shares for the shareholder.
Several factors must be considered when establishing a firm's dividend
policy. These include
The liquidity position of the firm – just because a firm has income
doesn't mean that it has any cash to pay dividends.
Need to repay debt – oftentimes there are negative covenants that
restrict the dividends that can be paid as long as the debt is
outstanding.
The rate of asset expansion – the greater the rate of expansion of
the firm, the greater the need to retain earnings to finance the
expansion.
Control of the firm – if dividends are paid out today, equity may
have to be sold in the future causing a dilution of ownership.
Legal Considerations:
Technically, it is illegal to pay a dividend except out of
retained earnings. This is to prevent firms from liquidating
themselves out from underneath the creditors.
Internal Revenue Service Section 531 – Improper Accumulation of
funds. This is to prevent individuals from not paying dividends
in order to avoid the personal income taxes on the dividend
payments.

Is it in the best interests of shareholders to pay out earnings as
dividends or to reinvest them in the company? The answer to this depends
upon the investment opportunities that the firm has.
There are three fundamental policies to paying cash dividends that firms
employ:

1) Pay a constant dollar amount each year regardless of earnings per
share. This is what most firms do.

2) Use a constant payout ratio (for example, 50% of EPS)

3) Pay a low, fixed dividend amount plus "dividend extras" or "special
dividends". This allows the company to avoid having to cut dividends
since the basic dividend is low, but also avoids the improper
accumulation of funds during good years.

A cut in dividends generally hurts a stock's price because it sends a
signal to stockholders that management's outlook for the future is that the
company cannot continue to pay the dividend. Most companies therefore
start off with a low dividend and only increase it when they feel that the
earnings prospects have improved sufficiently to allow for maintaining a
higher dividend. Many companies will even borrow money in a bad year in
order to avoid cutting the dividends.

The market price is influenced by dividends through what is called the
"clientele" effect. That is, some investors want dividends (such as
retirees and pension funds) while others do not want dividends (wealthy
individuals) but would prefer capital gains (which are taxed at a lower
rate and deferred).

Flotation costs encourage a company to retain earnings in order to minimize
having to sell additional stock in the future. As we saw in the cost of
capital calculations, the flotation costs make new equity more expensive
than retained earnings.

Some companies pay no dividends. Why? Because they have good investment
opportunities and reinvest the earnings.

1. Forms of Payment
Cash dividends (most common) are those paid out in the form of a cheque.
Such dividends are a form of investment income and are usually taxable to
the recipient in the year they are paid. This is the most common method of
sharing corporate profits with the shareholders of the company. For each
share owned, a declared amount of money is distributed. Thus, if a person
owns 100 shares and the cash dividend is $0.50 per share, the person will
be issued a cheque for $50.
Stock or scrip dividends are those paid out in form of additional stock
shares of the issuing corporation, or other corporation (such as its
subsidiary corporation). They are usually issued in proportion to shares
owned (for example, for every 100 shares of stock owned, 5% stock dividend
will yield 5 extra shares). If this payment involves the issue of new
shares, this is very similar to a stock split in that it increases the
total number of shares while lowering the price of each share and does not
change the market capitalization or the total value of the shares held.
Property dividends or dividends in specie (Latin for "in kind") are those
paid out in the form of assets from the issuing corporation or another
corporation, such as a subsidiary corporation. They are relatively rare and
most frequently are securities of other companies owned by the issuer,
however they can take other forms, such as products and services.
Other dividends can be used in structured finance. Financial assets with a
known market value can be distributed as dividends; warrants are sometimes
distributed in this way. For large companies with subsidiaries, dividends
can take the form of shares in a subsidiary company. A common technique for
"spinning off" a company from its parent is to distribute shares in the new
company to the old company's shareholders. The new shares can then be
traded independently.
2. Dates
Dividends must be "declared" (approved) by a company's Board of Directors
each time they are paid. For public companies, there are four important
dates to remember regarding dividends. These are discussed in detail with
examples at the Securities and Exchange Commission site
The declaration date is the day the Board of Directors announces its
intention to pay a dividend. On this day, a liability is created and the
company records that liability on its books; it now owes the money to the
stockholders. On the declaration date, the Board will also announce a date
of record and a payment date.
The in-dividend date is the last day, which is one trading day before the
ex-dividend date, where the stock is said to be cum dividend ('with
[including] dividend'). In other words, existing holders of the stock and
anyone who buys it on this day will receive the dividend, whereas any
holders selling the stock lose their right to the dividend. After this date
the stock becomes ex dividend.
The ex-dividend date (typically 2 trading days before the record date for
U.S. securities) is the day on which all shares bought and sold no longer
come attached with the right to be paid the most recently declared
dividend. This is an important date for any company that has many
stockholders, including those that trade on exchanges, as it makes
reconciliation of who is to be paid the dividend easier. Existing holders
of the stock will receive the dividend even if they now sell the stock,
whereas anyone who now buys the stock will not receive the dividend. It is
relatively common for a stock's price to decrease on the ex-dividend date
by an amount roughly equal to the dividend paid. This reflects the decrease
in the company's assets resulting from the declaration of the dividend. The
company does not take any explicit action to adjust its stock price; in an
efficient market, buyers and sellers will automatically price this in.
Whenever a company announces a dividend pay-out, it also announces a "Book
closure Date" which is a date on which the company will ideally temporarily
close its books for fresh transfers of stock. Read "Book Closure" for a
better understanding.
Shareholders who properly registered their ownership on or before the date
of record, known as stockholders of record, will receive the dividend.
Shareholders who are not registered as of this date will not receive the
dividend. Registration in most countries is essentially automatic for
shares purchased before the ex-dividend date.
The payment date is the day when the dividend checks will actually be
mailed to the shareholders of a company or credited to brokerage accounts.
1.4 Types of Dividend Policies
There are many distinct dividend policies, but most policies fall into one
of three categories.
A. A stable dividend policy is characterized by the tendency to keep a
stable dollar amount of dividends per share from period to period.
Corporations tend to establish a predetermined target dividend payout
ratio in which dividends are increased only after management is convinced
that future earnings can support the higher dividend payment. Under this
policy, dividend changes will normally lag behind earnings changes. Firms
are reluctant to lower their dividend payments, even in times of
financial distress. Most firms follow a relatively stable dividend policy
for four reasons:
1. Many business executives believe that stable dividend policies lead
to higher stock prices. The empirical evidence on the relationship
between dividend policy and stock prices is inconclusive.
2. Investors may view constant or steadily increasing dividends as more
certain than a fluctuating cash dividend payment.
3. There is less chance to signal erroneous informational content with a
stable dividend policy. Thus, firms tend to avoid reducing the annual
dividend because of the information content that a dividend cut may
Convey.

EXAMPLE: Americana Products, Inc. earned $4,000,000 last year and paid
$1.40 per share in dividends on 1,000,000 outstanding shares. Because of a
temporary slump in the market, the firm expects to earn $3,600,000 this
year. If the Company maintains a stable dividend policy, it will maintain a
$1.40 dividend per share, despite the expected decline in earnings.
B. A constant dividend payout ratio policy is one in which a firm pays
out a constant percentage of earnings as dividends.
This policy is easy to administer once the firm selects the initial payout
ratio. A constant dividend payout policy will cause dividends to be
unstable and unpredictable, if earnings fluctuate. Few firms follow a
constant dividend payout policy because stock prices may be adversely
affected by highly volatile dividends.
1.5 FACTORS AFFECTING DIVIDEND POLICY
1. Stability of Earnings. The nature of business has an important bearing
on the dividend policy. Industrial units having stability of earnings may
formulate a more consistent dividend policy than those having an uneven
flow of incomes because they can predict easily their savings and earnings.
Usually, enterprises dealing in necessities suffer less from oscillating
earnings than those dealing in luxuries or fancy goods.

2. Age of corporation. Age of the corporation counts much in deciding the
dividend policy. A newly established company may require much of its
earnings for expansion and plant improvement and may adopt a rigid dividend
policy while, on the other hand, an older company can formulate a clear cut
and more consistent policy regarding dividend.

3. Liquidity of Funds. Availability of cash and sound financial position is
also an important factor in dividend decisions. A dividend represents a
cash outflow, the greater the funds and the liquidity of the firm the
better the ability to pay dividend. The liquidity of a firm depends very
much on the investment and financial decisions of the firm which in turn
determines the rate of expansion and the manner of financing. If cash
position is weak, stock dividend will be distributed and if cash position
is good, company can distribute the cash dividend.

4. Extent of share Distribution. Nature of ownership also affects the
dividend decisions. A closely held company is likely to get the assent of
the shareholders for the suspension of dividend or for following a
conservative dividend policy. On the other hand, a company having a good
number of shareholders widely distributed and forming low or medium income
group, would face a great difficulty in securing such assent because they
will emphasise to distribute higher dividend.

5. Needs for Additional Capital. Companies retain a part of their profits
for strengthening their financial position. The income may be conserved for
meeting the increased requirements of working capital or of future
expansion. Small companies usually find difficulties in raising finance for
their needs of increased working capital for expansion programmes. They
having no other alternative, use their ploughed back profits. Thus, such
Companies distribute dividend at low rates and retain a big part of
profits.

6. Trade Cycles. Business cycles also exercise influence upon dividend
Policy. Dividend policy is adjusted according to the business oscillations.
During the boom, prudent management creates food reserves for contingencies
which follow the inflationary period. Higher rates of dividend can be used
as a tool for marketing the securities in an otherwise depressed market.
The financial solvency can be proved and maintained by the companies in
dull years if the adequate reserves have been built up.

7. Government Policies. The earnings capacity of the enterprise is widely
affected by the change in fiscal, industrial, labour, control and other
government policies. Sometimes government restricts the distribution of
dividend beyond a certain percentage in a particular industry or in all
spheres of business activity as was done in emergency. The dividend policy
has to be modified or formulated accordingly in those enterprises.

8. Taxation Policy. High taxation reduces the earnings of he companies and
consequently the rate of dividend is lowered down. Sometimes government
levies dividend-tax of distribution of dividend beyond a certain limit. It
also affects the capital formation. N India, dividends beyond 10 % of paid-
up capital are subject to dividend tax at 7.5 %.

9. Legal Requirements. In deciding on the dividend, the directors take the
legal requirements too into consideration. In order to protect the
interests of creditors an outsiders, the companies Act 1956 prescribes
certain guidelines in respect of the distribution and payment of dividend.
Moreover, a company is required to provide for depreciation on its fixed
and tangible assets before declaring dividend on shares. It proposes that
Dividend should not be distributed out of capita, in any case. Likewise,
contractual obligation should also be fulfilled, for example, payment of
dividend on preference shares in priority over ordinary dividend.

10. Past dividend Rates. While formulating the Dividend Policy, the
directors must keep in mind the dividend paid in past years. The current
rate should be around the average past rat. If it has been abnormally
increased the shares will be subjected to speculation. In a new concern,
the company should consider the dividend policy of the rival organisation.
11. Ability to Borrow. Well established and large firms have better access
to the capital market than the new Companies and may borrow funds from the
external sources if there arises any need. Such Companies may have a better
dividend pay-out ratio. Whereas smaller firms have to depend on their
internal sources and therefore they will have to built up good reserves by
reducing the dividend pay out ratio for meeting any obligation requiring
heavy funds.

12. Policy of Control. Policy of control is another determining factor is
so far as dividends are concerned. If the directors want to have control on
company, they would not like to add new shareholders and therefore, declare
a dividend at low rate. Because by adding new shareholders they fear
dilution of control and diversion of policies and programmes of the
existing management. So they prefer to meet the needs through retained
earing. If the directors do not bother about the control of affairs they
will follow a liberal dividend policy. Thus control is an influencing
factor in framing the dividend policy.

13. Repayments of Loan. A company having loan indebtedness are vowed to a
high rate of retention earnings, unless one other arrangements are made for
the redemption of debt on maturity. It will naturally lower down the rate
of dividend. Sometimes, the lenders (mostly institutional lenders) put
restrictions on the dividend distribution still such time their loan is
outstanding. Formal loan contracts generally provide a certain standard of
liquidity and solvency to be maintained. Management is bound to hour such
restrictions and to limit the rate of dividend payout.

14. Time for Payment of Dividend. When should the dividend be paid is
another consideration. Payment of dividend means outflow of cash. It is,
therefore, desirable to distribute dividend at a time when is least needed
by the company because there are peak times as well as lean periods of
expenditure. Wise management should plan the payment of dividend in such a
manner that there is no cash outflow at a time when the undertaking is
already in need of urgent finances.

15. Regularity and stability in Dividend Payment. Dividends should be paid
regularly because each investor is interested in the regular payment of
dividend. The management should, inspite of regular payment of dividend,
consider that the rate of dividend should be all the most constant. For
this purpose sometimes companies maintain dividend equalization Fund.

Chapter – 2 Research Methodology

Research Problem:
Efficient Market Hypothesis states that it is impossible to 'beat the
market' because the stock market efficiency causes the stock prices to
incorporate and reflect all the new information in the stock prices. We
want to study whether the markets are efficient when the dividend policy is
announced by the corporate. There are certain issues which are to be
focused upon. They are:
To find out any relation between corporate dividend policy and market
value of a company.
To analyze the effect of corporate dividend decisions in terms of
creating abnormality in the price and volume of the company.
To check whether the markets are efficient when any news about
dividend decisions of a company is received.
Literature Review:
Modigliani and Miller (1961) have shown, investors may be indifferent
about the amount of dividend as it has no influence on the value of a
firm. Any investor can create a 'home made dividend' if required, or
can invest the proceeds of a dividend payment in additional shares as
and when a company makes dividend payment. Similarly, managers may be
indifferent as funds would be available or could be raised without any
floatation costs for all positive net present value projects.
Lintner (1956) analyzes as to how firms set dividends and concluded
that firms have four important concerns. Firstly, firms have long-run
target dividend payout ratios. The payout ratio is high in case of
mature companies with stable earnings and low in case of growth
companies. Secondly, the dividends change follows shift in long-term
sustainable earnings. The managers are more concerned with dividend
changes than on absolute level. Finally, managers do not intend to
reverse the change in dividends. He finds that firms pay predictable
and regular dividends to investors; whereas the earnings of corporate
firms could be erratic. This implies that shareholders prefer
smoothened dividend income.
Brealey (1992) poses the dividend policy decision as "What is the
effect of change in cash dividends, given the firm's capital-budgeting
and borrowing decisions?" In other words, he looks at dividend policy
in isolation and not as a by-product of other corporate financial
decisions.
Baker, Veit and Powell (2001) study the factors that have a bearing on
dividend policy of corporate firms traded on the Nasdaq. The study,
based on a sample survey (1999) response of 188 firms out of a total
of 630 firms that paid dividends in each quarter of calendar years
1996 and 1997, finds that the following four factors have a
significant impact on the dividend decision: pattern of past
dividends, stability of earnings, and the level of current and future
expected earnings. The study also finds statistically significant
differences in the importance that managers attach to dividend policy
in different industries such as financial versus non-financial firms.
Fama and French (2001) analyzed the issue of lower dividends paid by
corporate firms over the period 1973-1999 and the factors responsible
for the decline. In particular, they analyzed whether the lower
dividends were the effect of changing firm characteristics or lower
propensity to pay on the part of the firms. They observed that
proportion of companies paying dividend has dropped from a peak of
66.5% in 1978 to 20.8% in 1999. They attributed this decline to the
changing characteristics of firms: "The decline in the incidence of
dividend payers is in part due to an increasing tilt of publicly
traded firms toward the characteristics- small size, low earnings, and
high growth- of firms that typically have never paid dividends."
Objectives of the Study:
To explore the insight f a corporate event named "Dividend Policy"
which drags lot of attention and results into may drastic changes in
the market valuaton of he firm.
To study the impact of 'dividend' on the price and volume before and
after such vidend is announced.
To check whether abnormality exists in the price and volume of the
share as the 'dividend' is announced.
To find out the room for leakage of any insider information about
'dividend policy' of a company
To check whether any insider information plays any part in abnormal
trading effect and abnormal price effect in a script.
To analyze the bearing of such abnormality (if it does exist) on the
market capitalization and volumes traded on the stock market a month
before the Announcement Date and a month after the ex-dividend date
for all the scripts under the study.
To measure the cumulative impact of 'corporate dividend policy' and
try to conceive a general trend based on it.

Research Design:
Exploratory Research

Scope of the Study:
To do a relative analysis between BSE-500 index and share prices of
selected companies.
Limited to Top 30 companies according to market capitalization and
which have declared dividend in the year 2009.
Limited to BSE-500 companies only.

Sampling:
Sampling Technique : Judgmental sampling
Sampling Unit : One company of BSE-500
Sampling Size : 30 companies from BSE-500 index
Data Sources:
Secondary Data
Prowess software of CMIE
Internet Sources
Business Journals
Research papers
Method of Analysis:
CAPM (Regression Model)
Limitation of the Survey:
The results of the analysis might differ if any model other than CAPM
(Regression Model) is used.
The study is limited to the top 30 companies from BSE-500 index,
which have declared dividend in the year 2009.
While studying the effect of corporate dividend policy on the market
price of the script, it is assumed that all the other factors
affecting the market price are constant.
In this part, we will explain you how we have calculated the abnormal
return using the excel worksheet from the data that we got from the Prowess
Database. We will also explain you how to read each and every data and
information that we generated and mentioned in the report.

Steps to find out Abnormal Price Effect
A. Collect data from Prowess Database and sent it to Excel Worksheet

As we mentioned earlier, we gathered daily share price data from Prowess
Database software and then to process on the data we sent them to the
excel worksheet. The above sheet represents the type of data that we got.
We got closing price data, total volume traded, number of trade took place
during the day, total turnover took place during the day, total market
capital of BSE 500 and closing value of BSE 500 index.

B. Find out daily script return

To process further, we need to find out daily script return of each day
in comparison with the previous day's closing price. As this sheet
represents how we found out the daily script return in percentage terms
by taking previous day's closing as base.

C. Find out daily Market Return

To find out the daily market return, we used the same formula as we had
used in finding out the daily script return. As we can see in this sheet,
we found out the BSE 500 return by taking previous day's closing as a
base. The return that we found out by the mentioned formula was in terms
of numbers, but we turned it into percentage to make it meaningful
interpretation.

D. Find out the regression between script return and market return

After finding out the daily script and market return for the event
period, the next step is to find out the regression between script and
market return. To find out the regression, we selected the period of 3
months before the Announcement Date of the dividend to 1 month before the
Announcement of the dividend (AD-90 to AD-30). This is because we assume
that most of abnormality in trading can start at max 1 month before the
dividend announcement due to some insider leakage of information. Before
that period, script tends to react in a normal manner.
So in our research, that period would be the standard normal period which
could be used to find out expected return. As we can see in this window,
the Y range indicates script return for the above mentioned period and X
range indicates market return for the above mentioned period. Then using
the MS Excel Regression analysis tool (which is there in the Tools menu),
we found out the regression analysis chart which is shown below. [To get
the Regression tool, go to Tools menu, then to Add Inn… and select
Analytical Tool Pack, after that go to tools menu again and you will find
Data Analysis in the list, go into that and regression option.]
Once we feed data in the above model, we could find out the summary
output as mentioned in this sheet. From the summary that we got, there
are 3 things important for our research. They are shown here: R-Square,
Alpha and Beta. The explanation of each of the terms and how to read that
data is given below:

R-Square:
The R-Squared value shows how reliable the dependent variable on the
independent variable is. It varies between 0 and 1. An R-Squared value of
1 indicates perfect correlation with the index. The higher the R-Square,
the better correlation exists between the script return and market
return. So that leads to some of good decision making and helps in proper
judgment and interpretation. Generally, R-Square of more than 0.50 is
considered to be good.

Y-Intercept (a) :(Alpha)
The 'a' is called the Y-intercept because its value is the point at which
the regression line crosses the Y-axis that is the vertical axis. It is
also called Alpha.
Slope of line (b) :(Beta)
The 'b' is called the slope of the line. It represents how much each unit
change of the independent variable X changes the dependent variable Y. It
is also called Beta of script in comparison of market.
Both 'a' and 'b' are numerical constants because for any given straight
line, their values do not change.
E. Find out Expected Return

So from the above figures, we can frame a regression line for each of the
script as follows:
Y= a+bX
Suppose we know that 'a' is 3 and 'b' is 2. Let us determine what Y would
be for an X equal to 5. When we substitute the values of a, b and x in
the above equation, we find the corresponding value of Y to be 13. As
mentioned in the above regression line, we found out the expected return
for the event period (AD-30 to ED+30). The formula used can be seen in
this sheet.
F. Find out the abnormal return

The abnormal return for a given day can be found out by subtracting
expected return for a day (which is found by using regression line as
shown above) from the actual return for a day (which is found out in step
B). This sheet represents the same thing. Positive abnormal return
indicate that how much positive effect is generated by the event among
the investors. In the same way, negative abnormal return indicate clearly
the opposite scenario for the script. As we can see in this sheet, the
abnormal for is because the actual return on the
script is which is indeed very high than the expected return of
for that day. This return is for only one day. The real effect of such
event can be seen by taking broader view and seeing cumulative effect
through a particular period.

G. Find out Cumulative abnormal return

As mentioned above, to study the long term and short term effect of the
event, we have divided the event period in different windows. So to check
the cumulative effect of the abnormal return in a given window can be
found out by getting cumulative abnormal return for that period. So we
have found out the cumulative abnormal return for each window by using
the formula which can be seen in this sheet. The detail of cumulative
abnormal return for each script is shown in the next chapter.

H. Find out the Cumulative abnormal return for a given window

From the above sheet, we can see how to find out cumulative abnormal
return for a given window. As we can see that in window AD-30 to AD-1,
the cumulative abnormal return is , so there is positive abnormality
in return can be seen 1 month before the split was announced but we can
see in other window AD-10 to AD-1 that the cumulative abnormal return is
large negative and which indicates some kind of leakage in
information must be done before the dividend was actually announced. In
the same way, we can observe cumulative abnormal return (CAR) for
different window.
In order to draw overall inferences for the event of interest, the
abnormal return observations are aggregated along the 2 dimensions-
through time and across securities. The following measures of abnormal
performance are used:
Cumulative Abnormal Return (CAR): cumulative sum of stock i's
prediction error (abnormal returns) over the window (t1,t2)
CARi(t1,t2)=1/T ARij
Average Abnormal Return (AAR): stock i's cumulative abnormal return
divided by the number of days in the window (t1,t2)
AARi (t1,t2)= CARi (t1,t2)/ni (t1,t2)
Mean Cumulative Abnormal Return (MCAR): average of the cumulative
abnormal returns sample average of firm AARs. This measure of abnormal
performance takes into account the fact that the number of days in that
window (t1,t2) may be different across firms and therefore gives a greater
weight to the ARs of firms for which this window is shorter. On the
contrary, MCAR gives same weight to every ARs. This implies that MAAR is
more powerful when the "abnormal behavior" of returns is concentrated in
short window, while MCAR is more powerful in detecting abnormal performance
over long window.across observations (firms); it is a measure of the
abnormal performance over the event period,
MCAR (t1,t2)= 1/N CARi (t1,t2)
Mean Average Abnormal Return (MAAR):
MAAR (t1,t2)=1/N AARi (t1,t2)

Steps to find out Abnormal Volume Effect

A. Find out average daily volume

We found out the abnormal volume trading by using simple average and
deviation of actual volume from the average volume. So to find out abnormal
volume the very first step is to find out average volume. As we assume that
there is normal trading takes place from the 3 months before the
announcement date to the 1 month before the announcement date. So we took
the average of that period using simple average formula as can be seen un
this data sheet. The average we get is the daily average volume and it
becomes the benchmark for our study and we can compare the actual volume
with this average volume.

B. Find out abnormal volume

To find out abnormal volume trading we subtract average volume from the
total volume for a day given. The abnormal volume can be positive of
negative. But in real life the volume traded can't be negative. Here
negative abnormal volume indicates how much less volume trading takes place
in comparison to expected volume traded.
C. Find out cumulative abnormal volume

As we have found in cumulative price effect in the same way we can found
out the cumulative volume traded for a given time period. This sheet
represents the same thing. Cumulative abnormal volume is useful as it
indicate how much abnormality in volume can be seen in given window period
or time period.
D. Find out cumulative abnormal volume for a given window
As already explain in the price effect, in the same way cumulative abnormal
volume for a given window can be found out using the above mentioned
formula. As we can see that there is huge abnormal volume trading can be
seen on announcement date and dividend date.

Chapter – 3 Efficient Market Hypothesis And Random Walk Theory

3.1 Introduction
In finance, the efficient-market hypothesis (EMH) asserts that financial
markets are "informationally efficient". The weak version of EMH suppose
that prices on traded assets (e.g., stocks, bonds, or property) already
reflect all past publicly available information. The semi-strong version
supposes that prices reflect all publicly available information and
instantly change to reflect new information. The strong version supposes
that market reflects even hidden/inside information. There is some disputed
evidence to suggest that the weak and semi-strong versions are valid while
there is powerful evidence against the strong version. Therefore, according
to theory, it is improbable to consistently outperform the market by using
any information that the market already has, except through inside trading.
Information or news in the EMH is defined as anything that may affect
prices that is unknowable in the present and thus appears randomly in the
future. The hypothesis has been attacked by critics who blame the belief in
rational markets for much of the financial crisis of 2007–2010, with noted
financial journalist Roger Lowenstein declaring "The upside of the current
Great Recession is that it could drive a stake through the heart of the
academic nostrum known as the efficient-market hypothesis."
The efficient-market hypothesis was developed by Professor Eugene Fama at
the University of Chicago Booth School of Business as an academic concept
of study through his published Ph.D. thesis in the early 1960s at the same
school. It was widely accepted up until the 1990s, when behavioral finance
economists, who were a fringe element, became mainstream. Empirical
analyses have consistently found problems with the efficient-market
hypothesis, the most consistent being that stocks with low price to
earnings (and similarly, low price to cash-flow or book value) outperform
other stocks. Alternative theories have proposed that cognitive biases
cause these inefficiencies, leading investors to purchase overpriced growth
stocks rather than value stocks. Although the efficient-market hypothesis
has become controversial because substantial and lasting inefficiencies are
observed, Beechey et al. (2000) consider that it remains a worthwhile
starting point.

3.2 The Efficient Market Hypothesis

When the term 'efficient market' was introduced into the economics
literature thirty years ago, it was defined as a market which 'adjusts
rapidly to newinformation' (Fama et al 1969).It soon became clear, however,
that while rapid adjustment to new information is an important element of
an efficient market, it is not the only one. A more moderndefinition is
that asset prices in an efficient market 'fully reflect all available
information' (Fama 1991). This implies that the market processes
information rationally, in the sense that relevant information is not
ignored, and systematic errors are not made. As a consequence, prices are
always at levels consistent with
'fundamentals'.The words in this definition have been chosen carefully, but
they nonetheless mask some of the subtleties inherent in defining an
efficient asset market. For one thing, this is a strong version of the
hypothesis that could only be literally true if 'all available information'
was costless to obtain. If information was instead costly, there must be a
financial incentive to obtain it. But there would not be a financial
incentive if the information was already 'fully reflected' in asset prices
(Grossman and Stiglitz 1980). A weaker, but economically more realistic,
version of the hypothesis is therefore that prices reflect information up
to the point where the marginal benefits of acting on the information (the
expected profits to be made) do not exceed the marginal costs of collecting
it (Jensen 1978).
Secondly, what does it mean to say that prices are consistent with
fundamentals? We must have a model to provide a link from economic
fundamentals to asset prices. While there are candidate models in all asset
markets that provide this link, no-one is confident that these models fully
capture the link in an empirically convincing way. This is important since
empirical tests of market efficiency – especially those that examine asset
price returns over extended periods of time – are necessarily joint tests
of market efficiency and a particular asset-price model.When the joint
hypothesis is rejected, as it often is, it is logically possible that this
is a consequence of deficiencies in the particular asset-price model rather
than inthe efficient market hypothesis. This is the 'bad model' problem
(Fama 1991).
Finally, a comment about the word 'efficient'. It appears that the term was
originally chosen partly because it provides a link with the broader
economic concept of efficiency in resource allocation. Thus, Fama began his
1970 review of the efficient market hypothesis (specifically applied to the
stockmarket):
The primary role of the capital [stock] market is allocation of ownership
of theeconomy's capitalstock. In general terms, the ideal is a market in
which pricesprovide accurate signals for resource allocation: that is, a
market in which firms canmake production-investment decisions, and
investors can choose among the securities that represent ownership of
firms' activities under the assumption that securities prices at any time
'fully reflect' all available information.The link between an asset market
that efficiently reflects available information (atleast up to the point
consistent with the cost of collecting the information) and its role in
efficient resource allocation may seem natural enough. Further analysis has
made it clear, however, that an informationally efficient asset market need
not generate allocative or production efficiency in the economy more
generally. The two concepts are distinct for reasons to do with the
incompleteness of markets and the information-revealing role of prices when
information is costly, and therefore valuable (Stiglitz 1981).

3.3 Predictions of Efficient Market Hypothesis
The efficient market hypothesis yields a number of interesting and testable
predictions about the behaviour of financial asset prices and returns.
Consequently, a vast amount of empirical research has been devoted to
testing whether financial markets are efficient. While the 'bad model'
problem plagues some of this research, it is possible to draw important
conclusions about the informational efficiency of financial markets from
the existing body of empirical research. This section presents a selective
survey of the evidence. Our conclusions are summarised in the table and
explained in more detail in the pages that follow.

Prediction Empirical Evidence
"Asset prices move as random "Approximately true. However: "
"walks over time. "Small positive autocorrelation for "
" "short-horizon (daily, weekly and "
" "monthly) stock returns. "
" "Fragile evidence of mean reversion "
" "in stock prices at long horizons "
" "(3–5 years). "
"New information is rapidly "New information is usually "
"incorporated into asset prices, "incorporated rapidly into asset "
"and currently available "prices, "
"information cannot be used to "although there are some exceptions. "
"predict future excess returns. "On current information: "
" "In the stockmarket, shares with high"
" "returns continue to produce "
" "high returns in the short run "
" "(momentum effects) "
" "In the long run, shares with low "
" "price-earnings ratios, high bookto- "
" "market-value ratios, and other "
" "measures of 'value' outperform "
" "the market (value effects). "
" "In the foreign exchange market, the "
" "current forward rate helps to "
" "predict excess returns because it is"
" "a biased predictor of the future "
" "exchange rate. "
"Technical analysis should "Technical analysis is in widespread "
"provide no useful information "use in financial markets. "
" "Mixed evidence about whether it "
" "generates excess returns. "
"Fund managers cannot "Approximately true. Some evidence "
"systematically outperform the "that fund managers "
"market. "systematically underperform the "
" "market. "
"Asset prices remain at levels "At times, asset prices appear to be "
"consistent with economic "significantly misaligned, for "
"fundamentals; that is, they are "extended periods. "
"not misaligned. " "

3.4 Random Walk Theory
What It Is:

The random walk theory states that market and securities prices are random
and not influenced by past events. The idea is also referred to as the
"weak form efficient-market hypothesis."
Princeton economics professor Burton G. Malkiel coined the term in his 1973
book A Random Walk Down Wall Street.

3.5 How it Works/Example:
The central idea behind the random walk theory is that the randomness of
stock prices renders attempts to find price patterns or take advantage of
new information futile. In particular, the theory claims that day-to-day
stock prices are independent of each other, meaning that momentum does not
generally exist and calculations of past earnings growth does not predict
future growth. Malkiel states that people often believe events are
correlated if the events come in "clusters and streaks," even though
streaks occur in random data such as coin tosses.
The random walk theory also states that all methods of predicting stock
prices are futile in the long run. Malkiel calls the notion of intrinsic
value undependable because it relies on subjective estimates of future
earnings using factors like expected growth rates, expected dividend
payouts, estimated risk, and interest rates.
The random walk theory also considers technical analysis undependable
because, according to Malkiel, chartists buy only after price trends are
established and sell only after price trends are broken; essentially, the
chartists buy or sell too late and miss the boat. According to the theory,
this happens because stock prices already reflect the information by the
time the analyst moves on the stock. Malkiel also notes that the widespread
use of technical analysis reduces the advantages of the approach.
Further, Malkiel finds fundamental analysis flawed because analysts often
collect bad or useless information and then poorly or incorrectly interpret
that information when predicting stock values. Factors outside of a company
or its industry may affect a stock price, rendering further the fundamental
analysis irrelevant.
There are two forms of the random walk theory. In both forms, the rapid
incorporation of information is disadvantageous for investors and analysts.
The semi-strong form states that public information will not help an
investor or analyst select undervalued securities because the market has
already incorporated the information into the stock price. The strong form
states that no information, public or private, will benefit an investor or
analyst because even inside information is reflected in the current stock
price.
Malkiel acknowledges some statistical anomalies pointing to some exceptions
to the random walk theory:
1. Prices of small, less liquid stocks seem to have some serial price
correlation in the short-term because they do not incorporate information
into their prices as quickly.
2. Contrarian strategies tend to outperform other strategies because
reversals are often based on economic facts rather than investor
psychology.
3. There are seasonal trends in the stock market, especially at the
beginning of the year and the end of the week.
4. Stocks with low P/E ratios tend to outperform those with high P/Es,
although the tendency is volatile over time.
5. High-dividend stocks tend to provide higher returns over time because
during down markets the high dividend yields often create demand for these
stocks and thus increases the price.
3.5 Why It Matters:
The random walk theory proclaims that it is impossible to consistently
outperform the market, particularly in the short-term, because it is
impossible to predict stock prices. This may be controversial, but by far
the most controversial aspect of the theory is its claim that analysts and
professional advisors add little or no value to portfolios. As Malkiel put
it, "Investment advisory services, earnings predictions, and complicated
chart patterns are useless... Taken to its logical extreme, it means that a
blindfolded monkey throwing darts at a newspaper's financial pages could
select a portfolio that would do just as well as one carefully selected by
the experts."
Malkiel and the random walk theory provide considerable support to the
intimidated individual investor, but Malkiel in particular encourages
investors to understand the theories and investment methods that the random
walk theory challenges. Malkiel therefore advocates a buy-and-hold
investment strategy as the best way to maximize returns.
3.6 Do Asset Prices Move as Randon Walks?
Asset prices in an efficient market should fluctuate randomly through time
in response to the unacticipated component of news (Samuleson 1985). Prices
may exhibit trends over time, in order that the total return on a financial
asset exceed the return on a risk-free asset by an amount commensurate with
the level of risk undertaken in holding it. However, even in this case,
fluctuations in the asset price away from trend should be unpredictable.
This section examines the emphirical evidence for this 'random walk
hypothesis' for stock prices. On balance, the evidence suggests that the
hypothesis is at least approximately true. While stock returns are
partially predictable, both in the short run and the long run, the degree
of predictability is generally small compared to the high variability of
returns.
In the aggregate US share market; above-average stock returns over a daily,
weekly or monthly interval increase the likelihood of further above-average
returns in the subsequent period (Campbell, Lo and Mackinlay 1997).
However, for example, only about 12 per cent of the variance in the daily
stock price index can be predictability than portfolios of large stocks.
There is also some weak evidence that the degree of predictability has
diminished over time. In a related literature, a number of studies have
found evidence of mean reversion in returns on stock portfolios at horizons
of three to five years or longer (Poterba and Summers 1988; Fama and French
1988). This implies that a ling period of below-average stock returns
increases the likelihood of a period of above-average returns in the
future. These conclusions are less robust, however, than the findings of
short-run predictability in returns. The most important problem is that
since long-horizon return are measured over years, rather than days or
weeks, there are fewer data points available, making precise statistical
inference difficult.

.

Chapter -4 Dividend Decisions:
Practical Facts

4.1 Dividend decisions
Dividends decisions are an important aspect of corporate financial policy
since they can hae an effect on the availability as well as the cost of
capital. The Lintner proposition which asserts that the corporate
management maintains a constant target payout ratio has been the most
influential.
However, the concepts of primary of dividend decisions as well as the
reasons for it are not unambiguously defined. There is a variety of
theories which attempt to rationalize the observed secular constancy of the
dividend payout ratio. These studies examine the factors underlying the
secular constancy of the dividend payout ratio. These studies examine the
factors underlying the structure of the management, the nature of the
product and financial markets, as well as the influence of the shareholders
in their attempt to explain the Lintner proposition. However, in the case
of any one firm, the following two pertinent questions need to be examined
on an empirical basis to provide substance to the notion of primary of
dividend decisions. (a) What are dividend decisions primary for? And (b)
for whom are they primary? An attempt has been made to develop a
theoretical framework to approach these questions and identify the
appropriate concept of primary and determine empirically the relationship
of the primary notion with the objectives of the share holders and the
management.
The modelling framework postulates that (a) the dividend decisions may be
primary to management of the firm and/or the shareholder, and (b) each of
the decision makers can have a short run and/or long run objective when
they evaluate dividend decisions. Share price increases have been
postulated as the basic short run objective of both the groups of
decisions. Share price increases have been postulated as the basic short
run objective of both the groups of decision makers. Similarly, both the
share holders and the management are viewed as net worth maximizes over
long run.
The fundamental hypothesis for the short run models is that the management
increases the dividend per share whenever the share price, and that the
share holder responds, to these in such a way as to increase the share
price. This result is expected if dividend decisions are primary for both
the groups.
In the long run context, it was felt that a progressive management would
increase the net worth the firm by investments in fixed assets of through
building the reserve base. Dividends would be primary decision if the
internal financing of investment is constrained by the necessity to pay
dividends at a constant rate.
These are two extreme forms on which dividend decisions can be considered
to be primary. A variety of intermediate positions are possible in any
specific case of a firm. The models were designed to accommodate a rich
variety of such behavioural patterns. The theoretical structure was
empirically tested for 71 firms of the corporate sector in 6 industries
using the data of the Bombay Stock Exchange Directory for the period 1967-
68 to 1980-1. The results generally indicate indicate that the methodology
of the present study would be helpful in examine the notion of the primary
of corporate dividend policy.
The following are the salient features of the empirical results.
(a) In the case of 17 firms dividend decisions were found to be primary.
The factors which accounted for primary were the following:
1) Need to build the desired internal reserve base in the long run, and
2) Inadequacy of funds to finance available investment opportunities
while maintaining a desired payout ratio.
(b) The Lintner hypothesis was validated under the following circumstance:
(1) The managers are oriented towards building up reserves to minimize
dependence on external funds,
(2) There is a lack of motivation or market opportunity for growth of the
firm and
(3) There is no shortage of funds to pursue the desired objectives.
(c) Primary of dividends in the long run was observed in the case of 27
firms. The significant reasons were
(1) Shortage of funds to take care of growth opportunities as well as
requisite dividends, and
(2) Inadequacy of funds the desired reserve base.
Throughout this analysis dividend decisions were considered to be primary,
if and only if, both the groups of decision makers agree to the same
objective and respond to each other's perception of goal satisfaction.
Viewed from this vantage point dividend decision were primary only in a few
cases. The Lintner hypothesis of a constant dividend payout ratio appears
to hold only because of managerial motivations and not as a response to
share holders desire. To that extent attributing primary to dividend
decisions in such content appears to be misplaced. Most of the management
in the corporate sector appears to desire the security of internal
financing and build reserves s a priority after paying certain minimum
dividend per share. Despite these conclusions from the models of the
present study two inadequacies became apparent during the course of work:
(a) the goals pursued by the management and the share holders can be at
variance. The conflict resolution mechanism has not been explicitly
modeled. (b) The interrelationships between the short run and long run
models are as yet tenuous. Further progress along these lines is possible.
But it will be an agenda for the future.
4.2 Role of insider Trading
The existence and implications of asymmetric information in financial
markets has been the subject of extensive research in the finance
literature. Two of the major propositions in this literature are that (1)
corporate insiders take advantage of asymmetric information by trading on
their informational advantage and (2) dividend policy is related to
asymmetric information. Taken together, these propositions imply that the
dividend policy of a firm and the trading gain realized by its insiders
may be related because both are related to the level of information
asymmetry between the firms insider and outside investors.
The first proposition arises from the widely accepted notion that corporate
insiders often possess and trade on information about the value of their
firms shares (relative to the current stock price) that outside investors
do not possess. This information asymmetry gives insiders the ability to
identify and take advantage of mispricing in the shares of their own firms.
Jaffe(1974), finnerty (1976), seyhun (1986), jeng, Metrick, and Zeckhauser
(1999), and Lakonishok and Lee (2001) provide evidence that insiders earn
significant abnormal profits from trading in their own firms shares, though
estimates of the sizes of the size of these profits vary widely. It should
be noted that this trading is within the legal boundaries set by the
securities and exchange commission (SEC) and is therefore not illegal
insider trading.
The second proposition is consistent with three different theories about
the role of dividend policy in financial markets. The first theory is what
we shall refer to as the " free cash flow theory" of dividends. This
theory focuses on the divergence of interest between managers and
shareholders and on dividends as a disciplining mechanisam that reduces the
agency cost associated with such a divergence. The payment of dividend
reduces free cash flow, forcing firms to enter the capital market more
frequently and divulge information as they attempt to get financing for
their operations and investments. This subject them to the scrutiny of
investment bankers, analysts, and potential new investors more often and
serves to reduce the investors. Thus, higher dividend should be associated
with reduced information asymmetry, all else being equal.
The second theory is what we shall call the "institutional monitoring
theory" which is based on allen bernardo and Welch (2000). This theory
rests on two assumptions. The first is that insitiutional investors are
more effective at monitoring management than retail investors. Due to the
size of their investments and the resources at their disposal,
institutional investors have greater incentive and ability to gather and
analyze information pertaining to their investments, as well as a greater
ability to discipline management and push for changes when management
performs poorly. The second assumption is that institutional investors
prefer high dividends relative to individual investors due to mainly the
tax effects.

Chapter – 5 Empirical Research on Dividend Decisions

AUTO SECTOR
1. Hero Honda

Abnormal Return (Price): (In Percentage)

"Time Window "Cum. Ab. Volume "
"AD-30 TO AD-01 "-11.63% "
"AD-10 TO AD-1 "2.32% "
"AD "-13.39% "
"AD+1-ED-1 "-2.12% "
"ED "-0.57% "
"ED+1-ED+10 "0.49% "
"ED+1-ED+30 "6.93% "
"Mean Daily Ab. Return "0.05% "

Interpretation
We can see that before announcement date of dividend within the period of
30 days there was huge abnormal effect on price. This might be because of
leakeage of insider information. Before ten days of announcement date there
was a sharp rise in prices. Prices tend to fluctuate during the period
between AD to ED. But after effective date nominal changes took place in
price. But no positive cumulative returns are generated. So investors have
to think before they invest in this company.
Abnormal Return (Volume):

"No " "AD-30 to "AD-10 "AD "AD+1 to ED-1"ED "ED+1 to "ED+1 to "
" " "AD-1 "to " " " "ED+10 "ED+30 "
" " " "AD-1 " " " " " "
"1 "Cum. "2,433.26 "866.75"192.74 "28,629,179.7"373,877.20"3,697,713.3"8,055,547"
" "AB " " " "5 " "9 ".77 "
"2 "Days "30 "10 "1 "53 "1 "10 "30 "
"3 "Ave. "81.11 "86.68 "192.74 "540173.20 "373877.19 "369771.34 "268518.26"
" "Daily " " " " " " " "
" "AB " " " " " " " "
" "(1/2) " " " " " " " "
"4 "Ave. " " " " " " "913.80 "
" "Vol. " " " " " " " "
"5 "AB/Ave"0.09 "0.09 "0.21 "200.83 "409.14 "404.65 "293.85 "
" "(3/4) " " " " " " " "

Interpretation
The above chart and table suggest that there is abnormality in the volume
to considerable extent. Till announcement date there was no huge volume of
trade taking place. But after announcement date the volume trading goes on
increasing. On announcement date there was fall in price of the script but
after AD price went on increasing and also the volume was increasing. On
ED maximum volume of trading took place and sharp rise in price was also
seen on that date. This indicates the impact of distribution of dividend
news on stock market. However after that the volume trading went on
decreasing as well price after ED+30 has shown a rising trend

2. Maruti Suzuki

"AD-30 TO AD-01 "-16.78% "
"AD-10 TO AD-1 "-9.31% "
"AD "-1.50% "
"AD+1-ED-1 "-31.58% "
"ED "0.24% "
"ED+1-ED+10 "-0.78% "
"ED+1-ED+30 "-0.68% "
"Mean Daily Ab. Return "-0.30% "

Interpretation
We can find that there is a perfect negative trend line in the price effect
chart. The Cum AB returns are falling. However on Announcement date a
positive rise was seen in price of script but after that again it went on
reducing. Again on during period near ED there was nominal rise in prices
but after that it went on fluctuating and after ten days of ED there was
fall in price and after that it again had rise. So we can interpret that
announcement and effective dates had a short term impact on price but after
that price always decreased. This shows the bearish trend in market has
affected the script. This might be due to high positive beta of the script.
However this is not a good script for the investors to invest as it does
not generate positive abnormal returns.

"No" "AD-30 to "AD-10 to "AD "AD+1 to "ED "ED+1 to "ED+1 to "
" " "AD-1 "AD-1 " "ED-1 " "ED+10 "ED+30 "
"1 "Cum. AB"-1,670,679"-405,328.6"272,920"-14,078,95"-218,981.9"-1,328,906"-2,972,1"
" " ".03 "9 ".05 "2.95 "5 ".59 "49.82 "
" " " " " " " " " "
"2 "Days "30 "10 "1 "130 "1 "10 "30 "
"3 "Ave. "-55689.300"-40532.869"272920."-265640.62"-218981.94"-132890.65"-99071.6"
" "Daily "85 "23 "0513 "17 "87 "9 "6068 "
" "AB " " " " " " " "
" "(1/2) " " " " " " " "
"4 "Ave. " " " " " " "322488.9"
" "Vol. " " " " " " "487 "
"5 "AB/Ave "-0.17 "-0.13 "0.85 "-0.34 "-0.68 "-0.41 "-0.31 "
" "(3/4) " " " " " " " "

Interpretation
We can see positive abnormal volume on announcement date but after that the
volume has shown a decreasing trend. Before announcement date also there
was a negative abnormal volume in script. But on announcement date maximum
volume of trade took place and even there was increase in price of script
on announcement date. This is due to the news of declaration of dividend.
We can say that the move of declaring dividend has not been able to
generate either positive abnormal volume or positive cum AB return for the
investors

3. Tata Motors


"AD-30 TO AD-01 "-26.62% "
"AD-10 TO AD-1 "2.00% "
"AD "-3.85% "
"AD+1-ED-1 "17.09% "
"ED "-1.22% "
"ED+1-ED+10 "16.13% "
"ED+1-ED+30 "25.56% "

Interpretation
We can observe a positive Cum AB return before 30 days of announcement
date. But before 10 days of announcement date there was sharp fall in the
price. However after that again had rise but for very short period and
again on announcement date there was no positive effect on price. After
announcement date there was nominal rise in price but again it followed a
declining trend. But after effective date price started increasing and
showed a positive trend. It generated positive cumulative abnormal return
after effective date. This chart shows positive trend in price of script.
Investors have positive expectation about this script so that dividend and
other factors in market are not able to change their expectations. Thus we
can say that it is good script to invest.

" " "AD-1 "AD-1 " "ED-1 " "ED+10 "ED+30 "
"1 "Cum. AB"-139919.63"-40050.05 "2902.87"-162581.92"357.87 "131518.95 "179215.9"
" " " " " " " " "7 "
"2 "Days "30 "10 "1 "53 "1 "10 "30 "
"3 "Ave. "-4663.99 "-4005.01 "2902.87"-3067.58 "357.87 "13151.89 "5973.87 "
" "Daily " " " " " " " "
" "AB " " " " " " " "
" "(1/2) " " " " " " " "
"4 "Ave. " " " " " " "21016.13"
" "Vol. " " " " " " " "
"5 "AB/Ave "-0.22 "-0.19 "0.14 "-0.15 "0.02 "0.63 "0.28 "
" "(3/4) " " " " " " " "

Interpretation
We can see that there has been a positive effect on volume on announcement
and effective date. However during the period between ED to ED+10 there was
maximum effect on volume. During that time period price also showed a
continuous rise. Though after 10 days of effective date there was a decline
seen volume but the price still had shown the rising trend. But still it
generates a positive abnormal volume effect. This indicates a signal of
removal of abnormality in the script volume.

BANKEX SECTOR
4. SBI Bank
"AD-30 TO AD-01 "7.47% "
"AD-10 TO AD-1 "-2.30% "
"AD "-2.15% "
"AD+1-ED-1 "0.70% "
"ED "-2.87% "
"ED+1-ED+10 "10.73% "
"ED+1-ED+30 "14.49% "

Interpretation
We can view that before the dividend was announced there was a negative
Cum.AB. Return. This chart indicates that on announcement date and
effective date the script gave maximum negative Cum. AB return. But after
announcements and effective dates there was a positive cumulative abnormal
return generated. From this chart thus we can generate that this generates
positive cum.AB. Returns for the investors. So this is good script to
invest in.
" " "AD-1 "AD-1 " "ED-1 " "ED+10 "ED+30 "
"1 "Cum. AB"-1,602,983"-1,827,976"360,368"-4,492,536"-363,218.7"-2,915,610"-9,034,6"
" " ".21 ".31 ".28 ".08 "2 ".74 "19.79 "
"2 "Days "30 "10 "1 "28 "1 "10 "30 "
"3 "Ave. "-53432.77 "-182797.63"360368."-84764.83 "-363218.72"-291561.07"-301153."
" "Daily " " "28 " " " "99 "
" "AB " " " " " " " "
" "(1/2) " " " " " " " "
"4 "Ave. " " " " " " "1036962."
" "Vol. " " " " " " "72 "
"5 "AB/Ave "-0.05 "-0.18 "0.35 "-0.15 "-0.35 "-0.28 "-0.29 "
" "(3/4) " " " " " " " "

Interpretation
As we see that there is a big amount of positive abnormality in volume on
announcement date.
This could be due to great amount of liquidity in script and price could be
such that small investors tempted to invest in it. But there is fall in AB
volume after announcement date. After annocement date the volume has
decreased. Moreover the price chart also indicates the positive return.
This shows that the decrease in volume is due to the few buyers who are
ready to buy this share at higher price.

5. ICICI Bank
"AD-30 TO AD-01 "-8.95% "
"AD-10 TO AD-1 "-3.81% "
"AD "-8.95% "
"AD+1-ED-1 "-7.44% "
"ED "-6.15% "
"ED+1-ED+10 "13.88% "
"ED+1-ED+30 "19.57% "

Interpretation
We can see that before the dividend was announced the script generated
negative Cum.AB. Return. But before 10 days of announcement date a sharp
rise in price was seen. This might be due to the inside information
leakage. On announcement date again there was a negative cumulative
abnormal return but after that the script generated good positive return.
So we can say that the declaration of news of announcement and effective
date generated positive returns for the company. Also we can infer from the
chart that there as positive trends in price of company. Thus this is the
good script to invest in for the investors.

"No " "
"AD-30 TO AD-01 "7.61% "
"AD-10 TO AD-1 "3.29% "
"AD "-2.15% "
"AD+1-ED-1 "10.05% "
"ED "0.44% "
"ED+1-ED+10 "-4.63% "
"ED+1-ED+30 "-7.85% "

Interpretation
We can see from the above chart that there was a negative abnormal return
in the script before 30 days of the announcement date. But after that it is
generating positive cum abnormal return till the period nearer to effective
date. But in the remaining half period between AD to ED the prices started
declining. After the effective date it again showed a rising trend. This
indicates that after the effective date the investors would have shown more
interest in selling of shares. From the above chart we can interpret that
no drastic effect has been seen on announcement date and effective date.


"No " "
"AD-30 TO AD-01 "0.12% "
"AD-10 TO AD-1 "1.50% "
"AD "0.01% "
"AD+1-ED-1 "11.45% "
"ED "-1.19% "
"ED+1-ED+10 "-2.48% "
"ED+1-ED+30 "-2.48% "

Interpretation
We can see from the above chart that before one month of announcement date
the script generated positive cum abnormal return. But during the period
between AD 30 to AD 10 there was negative effect on price. After that
price it had again shown a rising trend from the period between AD 10 to ED
10. This indicates that during this time period investors had shown more
interest in purchasing the script. After the 10 days of effective dividend
distribution date again the negative effect on the price was seen. This
indicates that after the effective distribution date share holders began to
sell of the scripts.

"No " "
"AD-30 TO AD-01 "-0.60% "
"AD-10 TO AD-1 "2.40% "
"AD "0.84% "
"AD+1-ED-1 "-10.07% "
"ED "2.05% "
"ED+1-ED+10 "-0.78% "
"ED+1-ED+30 "-8.27% "

Interpretation
We can see from the above chart that before the announcement date script
generated positive cumulative abnormal return. Again during the period from
announcement date to effective date there was a rising trend. But after the
effective date the script again began to generate negative cumulative
abnormal return. This indicates that large amount of buying took place
during the period upto the effective date. But after the dividend were
distributed the investors started selling their shares. This created a huge
selling pressures and due to this price had come down.
"No " "
"AD-30 TO AD-01 "1.75% "
"AD-10 TO AD-1 "-1.87% "
"AD "15.79% "
"AD+1-ED-1 "-51.52% "
"ED "-1.41% "
"ED+1-ED+10 "-8.86% "
"ED+1-ED+30 "-20.32% "

Interpretation
From the above chart we can see that before announcement date the script
generated positive cumulative abnormal return. But after announcement date
the price showed a negative trend. Again on effective date it had shown
some rise but immediately after that it began to fall down. This shows that
there is positive impact of declaration of announcement date and effective
date.

"No " "
"AD-30 TO AD-01 "6.94% "
"AD-10 TO AD-1 "16.66% "
"AD "-6.60% "
"AD+1-ED-1 "-26.13% "
"ED "-0.25% "
"ED+1-ED+10 "-6.27% "
"ED+1-ED+30 "-9.23% "

Interpretation
We can see from the above chart that before announcement date the script
gives negative cumulative abnormal return. On announcement date it gave
positive cumulative abnormal return. But after that the script gave
negative cumulative return upto the ED+10. After that it had again start
rising. However the overall the script generates negative cum abnormal
return.

"No " "
"AD-30 TO AD-01 "16.26% "
"AD-10 TO AD-1 "26.02% "
"AD "-3.59% "
"AD+1-ED-1 "-3.33% "
"ED "-1.63% "
"ED+1-ED+10 "7.19% "
"ED+1-ED+30 "10.76% "

Interpretation
From the above chart we can see that before announcement date the script
generated negative cumulative abnormal return, but before ten days of
announcement date the price had drastically rose. But after that it had
noticed a sudden fall. From effective date onwards again it began to rise
and generate positive cumulative abnormal return. Overall this script
generates positive cum abnormal return. This is good script to invest in.

"No " "
"AD-30 TO AD-01 "11.95% "
"AD-10 TO AD-1 "-14.46% "
"AD "6.03% "
"AD+1-ED-1 "-24.56% "
"ED "-1.95% "
"ED+1-ED+10 "-5.09% "
"ED+1-ED+30 "-8.16% "

Interpretation
From the above chart we can see that the script generated positive
cumulative return before announcement date. But declaration of announcement
of dividend created a negative effect. After that it went on decreasing.
Overall this script generated negative cum abnormal return. It is not a
good company to invest as it generates negative cum abnormal return.

"No " "
"AD-30 TO AD-01 "8.49% "
"AD-10 TO AD-1 "1.65% "
"AD "0.64% "
"AD+1-ED-1 "-10.79% "
"ED "-1.11% "
"ED+1-ED+10 "-1.88% "
"ED+1-ED+30 "-4.00% "

Interpretation
From the above chart we can see that the script generated negative
cumulative abnormal return. But starting from before ten days of
announcement date the script started generating positive cumulative
abnormal return. One of the reason for this might be the leakage of insider
information which might have cause such a price hike. But again starting
from before few days of effective date of dividend it again began to fall
downwards. Overall the script generated negative cumulative abnormal
return. So this is not a good script to invest in.

"No " "
"AD-30 TO AD-01 "3.75% "
"AD-10 TO AD-1 "-0.46% "
"AD "-1.78% "
"AD+1-ED-1 "11.52% "
"ED "-0.59% "
"ED+1-ED+10 "6.65% "
"ED+1-ED+30 "18.15% "

Interpretation
From the above chart we can observe that the script generated negative
cumulative abnormal return in the beginning but on announcement date there
was a cumulative positive abnormal return. Till the effective date no such
huge abnormal changes were apperent in price effect but starting from few
days of effective date there was a drastic positive change in price effect
and it generated a huge positive cumulative abnormal return for the
shareholders. This is good on part of investors. So it is good script to
invest.

"No " "
"AD-30 TO AD-01 "2.39% "
"AD-10 TO AD-1 "1.49% "
"AD "0.95% "
"AD+1-ED-1 "0.02% "
"ED "1.12% "
"ED+1-ED+10 "3.76% "
"ED+1-ED+30 "3.64% "

Interpretation
We can see from the above chart that in the beginning the script generated
positive cumulative abnormal return. But in the period between before AD 30
to AD 10 it generated negative cumulative abnormal return. On announcement
date it again fell down till the effective date. After that it again rose
and generated positive cumulative abnormal return. Overall return generated
from the script is positive so it is good script to invest in.

"No " "
"AD-30 TO AD-01 "-19.47% "
"AD-10 TO AD-1 "-13.23% "
"AD "-0.92% "
"AD+1-ED-1 "-10.31% "
"ED "-51.54% "
"ED+1-ED+10 "2.97% "
"ED+1-ED+30 "10.37% "

Interpretation
We can see that before the Announcement Date of Dividend, there was a big
negative Cumulative Abnormal Return. The return is somewhat better on the
Announcement Date. But the period between the day after the Announcement
Date and a day before the Ex-dividend date, there was a negative return.
But on the Ex-dividend date the script reached at the bottom, generating a
negative Cumulative Abnormal Return of 51.54%. This negative return is due
to the heavy selling on the Ex-dividend date. After the ex-dividend date,
the script has generated a return in positive. The return has increased
subsequently
"No " "
"AD-30 TO AD-01 "11.95% "
"AD-10 TO AD-1 "-14.46% "
"AD "6.03% "
"AD+1-ED-1 "-24.56% "
"ED "-1.95% "
"ED+1-ED+10 "-5.09% "
"ED+1-ED+30 "-8.16% "

Interpretation
positive Cumulative Abnormal Return. The return has somewhat worsened on
the Announcement Date. The return has turned negative on the Announcement
date. But the situation after the Announcement date has been somewhat good
till the ex-dividend date. But on the ex-dividend date, the return has also
worsened. But then after, the returns have reached its peak. So this is a
good script to invest in.

"No " "
"AD-30 TO AD-01 "-11.30% "
"AD-10 TO AD-1 "-8.01% "
"AD "3.61% "
"AD+1-ED-1 "-14.97% "
"ED "-2.43% "
"ED+1-ED+10 "5.38% "
"ED+1-ED+30 "13.34% "

Interpertation
We can see that before the Announcement date of dividend, there was a big
Announcement Date. But immediately after the announcement date the returns
had fallen sharply. This indicates that on the announcement date, there
must have been some adverse impact on the investors because of which the
returns have fallen down. The situation has improved on the ex-dividend
date and thereafter. So it is a good script to invest in.

"No " "
"AD-30 TO AD-01 "-22.32% "
"AD-10 TO AD-1 "-6.43% "
"AD "-3.32% "
"AD+1-ED-1 "-56.19% "
"ED "-4.12% "
"ED+1-ED+10 "-4.09% "
"ED+1-ED+30 "-4.86% "

Interpretation
returns have fallen down.

"No " "
"AD-30 TO AD-01 "-5.05% "
"AD-10 TO AD-1 "-5.33% "
"AD "-0.75% "
"AD+1-ED-1 "-24.43% "
"ED "-2.50% "
"ED+1-ED+10 "1.64% "
"ED+1-ED+30 "-8.80% "

Interpetation
returns have fallen down.

"No " "
"AD-30 TO AD-01 "18.84% "
"AD-10 TO AD-1 "19.00% "
"AD "2.26% "
"AD+1-ED-1 "-21.68% "
"ED "4.96% "
"ED+1-ED+10 "19.92% "
"ED+1-ED+30 "33.26% "

Interpretation
the Announcement Date and thereafter. But again on the ex-dividend date,
the returns have increased. Even after the ex-dividend date, the returns
have increased. So this is a good script to invest for the investors.

"No " "
"AD-30 TO AD-01 "1.60% "
"AD-10 TO AD-1 "-0.96% "
"AD "-1.82% "
"AD+1-ED-1 "12.87% "
"ED "-0.22% "
"ED+1-ED+10 "-4.46% "
"ED+1-ED+30 "3.92% "

Interpretation
negative Cumulative Abnormal Return. The return is further worsened on the
Announcement Date. But after the Announcement date, the returns have shot
up sharply. This indicates that there has been some positive impact on the
investors on the announcement date. But the returns have turned negative on
the ex-dividend date and thereafter.

"No " "
"AD-30 TO AD-01 "-10.08% "
"AD-10 TO AD-1 "-8.89% "
"AD "1.45% "
"AD+1-ED-1 "13.81% "
"ED "-0.26% "
"ED+1-ED+10 "0.87% "
"ED+1-ED+30 "0.41% "

Interpretation
had shot up sharply. This indicates that on the announcement date, there
must have been some positive impact on the investors because of which the
returns have increased. After the ex-dividend date, there has been
fluctuation in the returns.

"No " "
"AD-30 TO AD-01 "-16.82% "
"AD-10 TO AD-1 "-0.42% "
"AD "-2.85% "
"AD+1-ED-1 "8.01% "
"ED "-2.52% "
"ED+1-ED+10 "-13.20% "
"ED+1-ED+30 "-26.19% "

Interpretation
negative Cumulative Abnormal Return. The return is further worsened on the
Announcement Date. But after the Announcement date, the returns have shot
up sharply. This indicates that there has been some positive impact on the
investors on the announcement date. But the returns have turned negative on
the ex-dividend date and thereafter.

"No " "
"AD-30 TO AD-01 "5.15% "
"AD-10 TO AD-1 "6.18% "
"AD "1.54% "
"AD+1-ED-1 "-4.05% "
"ED "-0.62% "
"ED+1-ED+10 "-1.27% "
"ED+1-ED+30 "-0.16% "

Interpretation
the Announcement Date. The returns after the Announcement date have been
negative throughout which indicates that there has been some adverse impact
on the investors on the Announcement date.

"No " "
"AD-30 TO AD-01 "15.32% "
"AD-10 TO AD-1 "0.59% "
"AD "-0.05% "
"AD+1-ED-1 "0.44% "
"ED "0.17% "
"ED+1-ED+10 "-0.20% "
"ED+1-ED+30 "1.02% "

Interpretation
We can see that before the announcement date of dividend there was a big
positive Cumulative Abnormal Return. But it falls substantially on the
announcement date. This negative return is due to heavy selling on the
announcement day. The situation has improved thereafter till the ex-
dividend date. After the ex-dividend date, the returns have reduced.

Abnormal Return (Volume)
"No " "
"AD-30 TO AD-01 "-0.84% "
"AD-10 TO AD-1 "-1.29% "
"AD "0.10% "
"AD+1-ED-1 "11.84% "
"ED "-2.66% "
"ED+1-ED+10 "0.10% "
"ED+1-ED+30 "12.34% "

Interpretation
had shot up sharply. This indicates that on the announcement date, there
must have been some positive impact on the investors because of which the
returns have increased. The returns were negative on the ex-dividend date
but thereafter the returns have increased substantially.

"No " "
"AD-30 TO AD-01 "3.74% "
"AD-10 TO AD-1 "7.95% "
"AD "1.11% "
"AD+1-ED-1 "16.18% "
"ED "-0.45% "
"ED+1-ED+10 "0.41% "
"ED+1-ED+30 "19.44% "

Interpretation
This is a good script to invest in. The returns have remained positive
before and after the Announcement date. Only on the ex-dividend date, the
script showed negative returns, but after that the returns have been
positive. This indicates there has been some positive impact on the
investors on the ex-dividend date.

"No " "
"AD-30 TO AD-01 "-74.99% "
"AD-10 TO AD-1 "-13.06% "
"AD "0.14% "
"AD+1-ED-1 "-38.77% "
"ED "-9.32% "
"ED+1-ED+10 "-0.99% "
"ED+1-ED+30 "-30.06% "

Interpretation
returns have fallen down. The returns have remained negative after the
Announcement Date.

"No " "
"AD-30 TO AD-01 "27.50% "
"AD-10 TO AD-1 "13.95% "
"AD "-0.82% "
"AD+1-ED-1 "31.11% "
"ED "2.65% "
"ED+1-ED+10 "2.41% "
"ED+1-ED+30 "27.23% "

Interpretation
the Announcement Date. But after the Announcement date, the returns have
shot up sharply. This indicates that there has been some positive impact on
the investors on the announcement date. So this is a good script to invest
in for the investors.

"No " "
"AD-30 TO AD-01 "-1.36% "
"AD-10 TO AD-01 "-2.91% "
"AD "0.43% "
"AD+01 TO ED-01 "-6.23% "
"ED "-2.58% "
"ED+01 TO ED+10 "-10.75% "
"ED+01 TO ED+30 "-9.75% "

Interpretation
Mean cumulative Abnormal Return shows the average abnormal return for a
given window among the firms. We can see that it is low before the
announcement date. As dividend is announced cumulative abnormal return
rises, this shows that abnormality is created due to declaration of
dividend. So we can consider that on the basis of analysis of above 30
companies that on average on announcement date maximum price rise is seen
because declaration of dividend brings about positive impression in the
mind of investors towards the company. More over many intraday traders also
participate for short term gain during the entire day. This yields positive
cumulative abnormal return for the average companies. In addition if we
think rationally this is the normal and general tendency among the
investors. There is a big negative cumulative abnormal return between the
announcement date and effective date. The reason is that there is general
tendency among investors to wait till the effective date to realize the
dividend income. Due to this number of transaction taking place reduces.
This brings about negative cumulative abnormal effect during this period.
This is the normal market scenario. And we can see that market runs
accordingly. Even after the effective date the return goes on reducing. It
means big supply pressure is created by dividend effect which brought the
price down and so the abnormal value also comes down. The reason is that
after realizing the dividend income the share holders want to sell of the
shares but at that time other investors are not ready to purchase shares.
So This also shows the general tendency of investors of buying shares
after the dividend is announced and selling out on the ex-dividend date.

Mean Average Abnormal Return
"TIME WINDOW "Mean average Abnormal Return "
"AD-30 TO AD-01 "-0.20% "
"AD-10 TO AD-01 "0.07% "
"AD "0.43% "
"AD+01 TO ED-01 "-0.10% "
"ED "-2.58% "
"ED+01 TO ED+10 "0.16% "
"ED+01 TO ED+30 "0.12% "

Interpretation
Mean Average Abnormal Return indicates the daily average return in a given
window among the firms. We can see in the above chart that the average
abnormal return is highest positive on announcement date. Gradually from
the period AD to ED it again goes on decreasing. This is because of higher
participation among investors in market. But in long run that is after
effective date it again start rising. This is again because of huge buying
pressure that is generated by dividend effect. Thus it is better for any
new investor to invest in company as soon as divided is announced and
should sell of the shares immediately after the dividend is paid out.

Mean of Average Daily Cumulative Abnormal Volume
"TIME WINDOW "MADCAV "
"AD-30 TO AD-01 "556231.972 "
"AD-10 TO AD-01 "-160613.327 "
"AD "217554.3427 "
"AD+01 TO ED-01 "1087939.343 "
"ED "-167032.854 "
"ED+01 TO ED+10 "-846716.415 "
"ED+01 TO ED+30 "-2465219.33 "

Interpretation
MADCAV indicates the average daily cumulative abnormal volume among the
firms. As we can see form the above chart that maximum trading takes place
between announcement date to effective date time period. Before the
announcement date however, mainly before three months to one month maximum
trading take place. This indicates that there is good supply of shares and
at the same time new and small participation might also take place. After
effective date the abnormal return drastically reduces due to non
participation of large investors. When we see such huge abnormal effect in
comparison of price effect we can clearly say that there is huge abnormal
trading taking place after the dividend. But the supply pressure is so high
that it leads to decrease in price of shares resulting into negative
cumulative abnormal return.

Mean Ratio of AB. Volume To Avg Volume
"TIME WINDOW "MRABAV "
"AD-30 TO AD-01 "0.01 "
"AD-10 TO AD-01 "0.04 "
"AD "0.70 "
"AD+01 TO ED-01 "0.00 "
"ED "-0.24 "
"ED+01 TO ED+10 "0.01 "
"ED+01 TO ED+30 "0.21 "

Interpretation
This ratio indicates how much times the abnormal volume traded greater than
the average volume traded. During the period from AD-30 to AD the script
generated positive cumulative abnormal volume. We can see that the ratio is
very less before one month of announcement date. This is because there is
huge liquidity problem before announcement date in shares. On announcement
date ratio have reached to 0.70 which means that lot many investors have
participate to gain long term as well as short term gains. Intra traders
participate on this day to gain short term profits arising from price
fluctuations. This leads to very high positive cumulative abnormal return.
Between announcement date and ex-dividend date the ratio is very low. This
is because after dividend is announced people prefer dividend to be paid
and price to be come down in more tradable range. So in order to earn the
dividend income the investors retain their shares upto effective date.
Thus no transactions takes place as there are buyers but no sellers. This
brings about negative impact on volume of transactions thereby leading to
negative cumulative abnormal return. After effective date the ratio is seem
to be rising which means that investors have realized the dividend income
and now they want to sell of their shares. Buying pressure was already
there during the period between AD to ED. But now after the effective date
selling pressure have also generated. This neutralizes the effect and
thereby generate positive cumulative abnormal volume as more number of
takes place. Thus the market behaves in a rational manner.

Chapter – 7 Recommendations

Recommendations

The dividend news in the market creates abnormality in the return and
volume of the script, so that investor should not treat that markets are
always efficient.
Investors should behave rationally while taking their decision regarding
investment in any script. They should wait for the abnormality in the
script to be removed before investing in it.
For long term investor, dividend decision of a company should not be a
major influencing factor in their investment decision.
Investors should consider the fundamentals of the company before
investing in it and should consider the actual performance of the
company over the period of time.
Dividend as a corporate event affects the share prices of the firm for a
specific time period only. As dividend event gets over the abnormality
in the script is removed and the stock prices start reflecting its
actual value. So investors should not get lured by the dividends.
Directors should adopt a dividend policy which gives consideration to
the interests of each of the group comprising a substantial proportion
of shareholders.
A definite dividend policy, followed for a long period in the past
trends to create clientele effect. That is it attracts those investors
that consider the dividend policy in accord with their investment
requirements. If the company suddenly changes its dividend policy, it
may work to the detriment to those shareholders as they may have to
switch to other companies to fulfil their needs. Thus an established
dividend policy should be changed only after having an analyzed its
probable effect on existing shareholders. It should be changed slowly
and not abruptly.
A huge positive abnormal return before the announce date of dividend
indicates the sins of leakage of any insider information. So the
investor must check room for such insider information before investing
in that company. This will help them to protect themselves from future
losses.

Chapter – 8 Conclusions

Conclusions

This project examines the relation between dividend decision and its
impact on the market price of the stock.
The information about the corporate dividend policies brings
abnormality in the market and market does perform efficiently.
The movements in stock prices and trading volume are influenced by the
flow of new information into the market.
The dividend effect are reflected into the market price of the company
within the time period of few days before the announce date to few
days after the ex-dividend date.
Insider information plays vital role in the fluctuations of stock
price and trading volume of and company which has declared dividend.
We can conclude from this project that there is linear relationship
between dividend decision and market price of the company for a
limited duration. Thereafter the markets start behaving efficiently
and absorb all the available information in the market.

final project report on DIVEDEND POLICY @ MBA

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