Stock Price Reaction to Dividend Announcement: the Case of Bangladesh Capital Market

Abstract

Stock price response towards the ‘dividend announcement’ is highly supported both by theoretically and empirically. Investors consider several factors in investing funds in any particular securities of capital market of which the most important factor is the return from the investment in securities that typically depends on the dividend declaration. Company declares dividend in the form of cash and/ or stock with in the financial year (quarterly or biannually) to meet the expectations of investors considering the ability and strategy of the company. In this paper, a thorough investigation is done with the help of ‘event study methodology’ to analyze the effect of dividend announcement on stock prices taking seventy four listed companies of Dhaka Stock Exchange (DSE) in Bangladesh. The study finds that dividend declaration does not bring any gain to the investors; rather they lose due to substantial fall in share prices both in pre dividend and post dividend period as market passes through regular and continuous revision of directives of regulators to check a bullish market. It is expected that the study will not only help in developing investors’ awareness regarding stock price sensitivity towards dividend declaration, but also help to design their investment decision in a more rational, efficient and convenient way to protect their interest. Furthermore, it will help the companies to determine their good standing, aware investors in affluently designing their investment decision, and regulators, the prime policy makers, to take necessary initiatives for the betterment of all concerned.

Keywords: Dividend, Capital Market, Securities, SEC, Bangladesh.