Event Study - Using Econometrics Research Paper

Event Study - Using Econometrics - Research Paper Example (1996), who studied the relationship between dividend announcements and earnings, both of which appear simultaneously. As such, in practice, investment analysts who analyze long-term economic prospects are to be expected to inquire about information related to top management as well as changes in corporate strategy among other issues that are believed to have an impact on the company’s earnings (Denis, 1990; Marsh, 1993). These considerations are also very important in share trading decisions. One of the most anticipated types of regular returns on stocks are dividends. These are payments made by firms to their shareholders as a compensation for their capital. If dividend policy is frequently adjusted, then the variation in the stock prices would be expected to remain high. Variation in share prices occurs due to recurrent investors’ reactions ahead of important announcement by the companies, dividends announcement being among them. Such announcements are floated throug h the stock exchanges as well as made through annual reports for the purpose of reaching the investors. Nevertheless, some companies release crucial information through the press release even before they publish them in the annual reports, if the need arises. Furthermore, there are other mediums that transmit information to the investors in effect changing the prices of the stocks. Some of the announcement that may influence prices of shares include new product launch, management changeover, changes of government policies, starting and shutting down of projects, mergers and acquisitions, political changes, downsizing of firms, as well as the announcement of dividend, which is the focus of this study. The prices of stocks tend to change immediately the news hinting about these changes is received by the investors. The relevance of dividend announcements is a subject of considerable interest for many researchers in the field of finance. This subject has ignited considerable controvers y, considering the impact dividends announcement have before and after their announcement. This study builds upon different dividend literature by looking at the impact of dividend announcements for a multiple of firms that are listed in UK stock markets. The study will use an event study approach to examine abnormal returns for a total of 50 firms, which is potentially caused by the announcement of dividends for 21 days spreading between July 2012 and August 2012. The results indicate that the announcement of dividends that is accompanied with good news is received positively by investors; hence, more rate of increase of abnormal returns are experienced after the announcement. The results of this study also indicate that firms should be more prudent when making dividend policies as they have significant economic implications. This paper looks at the reactions of markets following a blend of dividend announcement by companies from the UK. These announcements are pointers that are or iginated by the managers of different companies in conditions of economic uncertainty, a scenario that is accompanied by varied investors interpretations and informational asymmetry. This study will be in accordance with the principles adopted in any empirical studies that investigate the impacts of share prices in relation to changes in dividends (for example, Charest 1978; Eades et al., 1985). Literature Review From the study of Ghosh and Woolridge (1988), it has been established that markets can