The Impact of Dividend Announcements on Shareholder Value: A Study of Select Financial Companies in India

Abstract

The financial industry is experiencing an exceptionally extensive growth, with the traditional corporations growing and new corporations entering the industry. The industry is highly diversified, comprising commercial banks, insurance companies, cooperative banks, non-banking financial institutions, mutual fund companies, and other financial entities. The question here is whether the financial sector announcements are reacted to by the investors and/or other stakeholders in the same manner as other segments are, or, on the contrary, they are impacted differently by the corporate announcements. This study is centred on seeing the effect of dividend announcements on stock returns, and more emphasis is given to the companies from the financial sector that are part of the NIFTY 100 index. This survey covers 20 financial companies from the index, which made a total of 82 announcements with regard to dividends between 2019 and 2023. The market model's event study methodology is used to test the impact of dividend announcements, and the returns that were projected are estimated by the market model.

Based on the attained data, the dividend announcements are associated with high and favourable effects on stock returns in the event period. The examination results of Average Abnormal Returns (AAR), Cumulative Average Abnormal Returns (CAAR), and the sub-event window returns also confirm that the market is already in a good mood when the announcement is made, hence the first days will show a positive market reaction. This research has, besides, found that dividends are most influential in the days right before the announcement is made. To sum up, it is concluded from the results that the market is embracing the announcement of dividends positively, which is a sign that the shareholders can gain from an abnormal return.