This paper will compare the short-term effects of a firmâs stock price during a dividend announcement and earnings announcements over the past 5 years and inform investors which announcement is more profitable. The structure of the research paper is in the following pattern. The next section comprises evidence and discussions of previous literature and theoretical standpoints on the topic. Subsequently, the paper describes the research objectives, question and the development of the hypothesis of dividend and earning announcements in the North American market. A discussion on our empirical models, as well as the data associated with them will be developed in our data and methodology section.
This review considers existing literature that has extensively analyzed the performance of stock prices after to earning announcements and dividend announcements. The main motive of these press releases is to inform investors of the firmâs financial performance, which ultimately allows investors to make informed trading decisions.Â Below these contributing factors were studied both separately and together in order to determine their effect on stock performance.
A Study of Quarterly Earning Announcements and Stock Price Reactions (2014):
Dsouza et al. (2014) examines the Efficient Market Hypothesis (EMH) in the Indian stock market by testing stock price reactions to different earning announcements. The EMH model was developed by Fama in the early 1960s, stating that stock prices reflect all the information and trading on the basis of this information will not produce abnormal profit2. The author studied further research done by Jensen (1978) who argued for the same theory by stating that it is not possible to make economic profits by trading on the basis of new information. Using this theory as a basis of the study the main objectives of this paper is to test whether the Indian Stock Market follows the semi-strong form of EMH and to observe the stock price reactions to quarterly earnings announcements2.
An event study was conducted using the quarterly results from December 2011 considering both âgood newsâ and âbad newsâ portfolios. The firms with positive change in the net profit and net sales of current and corresponding quarters are considered as âgood newsâ portfolio and the negative percentage change in the net profit and net sales of current and corresponding quarters as âbad newsâ portfolio2. The good news portfolio consists of 102 companies, 83 companies are included in the bad news portfolio and all 185 companies are included in the overall portfolio.Â A 61 day period surrounding the earning announcement date was studied (30 days prior and after event day) in order to determine any abnormal returns from the event. In addition to this a parametric t test was used to know whether the AARs and CAARs are different from zero.Â Non-parametric test like Run and Sign tests were used to test against the hypothesis.
The results show that AAR and CAAR values are positive for majority of the days during the event window and the earnings announcement had a positive impact on the market2. The significant CAARs show that the investors can use buy and hold strategy to gain abnormal returns. Based on the results, Dsouza et al. (2014) concludes that the Indian stock market is not efficient in the semi-strong form and quarterly earning announcements positively effect stock price performance overall.
Earnings and Dividend Announcements: Is There a Corroboration Effect? (1984)
The impact of Dividends and Earnings Announcements: a Reconciliation (1976):
Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift? (2012):
In previous literature is has been discussed how earning announcements and dividend announcements affect a firmâs stock performance.Â For both events a similar trend was seen where âgood newsâ announcements leads to positive abnormal returns where âbad newsâ discourages inve