Market reaction to the announcement of dividend payment: what do the theories of signaling and free cash flow explain?
Abstract
This study analyzed the effect of the dividend announcements on the stock price of firms listed in Brazil, Bolsa, Balcão (B3) between 1997 and 2017. 750 dividend announcements from 53 companies were analyzed, through an event study that sought to identify the existence of Cumulative Abnormal Returns (CARs) around the announcement dates. The results reveal abnormal returns in the 2 days that followed these dates, indicating that they are relevant to the Brazilian market, suggesting that the dividend policy is an important strategic factor for these companies. The main contributions of this study are the indication that firms can find out the best time to announce the dividend payments, to positively affect their market values. Still, under the prism of the theories of Signaling and Free Cash Flow, in Brazil it was not possible to verify the assumptions of Lang and Litzenberger (1989) that the CARs in response to the dividend announcements would be higher in firms with excess of investments and that investors anticipate the increase in dividends for companies that maximize value. Thus, these findings are useful in providing evidence on the relevance of dividend policy in helping to make investment decisions, especially when identifying abnormal returns around the dates of payment announcements, demonstrating that they signal the market with good news about the firms’ performance.
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References
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