An Empirical Study On The Market Reaction To Cash Dividend Announcements Of Chinese Listed Companies

Dividend decisions have been one of the most important issues in corporate finance. Since Modigliani and Miller proposed the dividend irrelevance theory, a great number of researches have been conducted to examine the relationship between dividend payout and firm value. Some of the findings have suggested that change in company’s dividend payout has the signaling effect on the market and the investors can make use of the information content of dividends when making investment decisions. However, the majority of the studies have been focused on developed stock markets while less attention has been paid to emerging markets.This paper is aimed to test whether the cash dividend policies of Chinese listed companies will have an impact on the stock price performance. The effect of earnings has been taken into account since in China cash dividend announcements are accompanied by earnings announcements. A sample of 1309 observations of joint earnings and cash dividend announcements has been studied and the research is structured into a preliminary test and a regression test. In the preliminary test, observations are classified into six groups according to the signs of earnings change and cash dividend change. Cumulative abnormal returns during a time window of ten days surrounding the announcement have been calculated and compared. The results have shown that the market reactions to different directions of cash dividend change are not significantly different regardless of the signs of earnings change. In the regression test, three models have been run to test the relationship between unexpected cash dividend (proxied by cash dividend change) and cumulative abnormal returns. The regression results indicate that unexpected cash dividend is not statistically significant while unexpected earnings (proxied by earnings change) remain statistically significant. These findings have shown that cash dividend policies have limited impact on stock price performance in Chin...