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Investigating the information content of dividends and factors affecting the market's reaction to the increase in dividends in Tehran Stock Exchange

Number of pages: 140 File Format: word File Code: 30834
Year: 2011 University Degree: Master's degree Category: Management
Tags/Keywords: Abnormal returns - debt ratio - Free cash flow - Growth opportunity - Institutional ownership - Stock turnover
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  • Summary of Investigating the information content of dividends and factors affecting the market's reaction to the increase in dividends in Tehran Stock Exchange

    Dissertation

    To receive a master's degree in business administration

    The investigation of the relationship between dividends and stock returns has long been one of the most difficult challenges facing financial economists. This is done by measuring the cumulative abnormal return. Especially in this study, we investigate the factors affecting the accumulated abnormal return in periods when the dividend increases or decreases. The goal is to see if the market reaction to dividend increases or decreases weakens over time. The ultimate goal of this study is whether dividends are still important to shareholders. In addition, in this research, we examine the factors that may affect the value of dividends. These factors include: company's free cash flow, debt ratio, institutional ownership, growth opportunity and liquidity (company's stock turnover). To test the research hypotheses, two methods of linear regression and consolidated data were used. The results showed that the accumulated abnormal return is not related to the increase and decrease of dividend. In addition, the results showed that the market's reaction to changes in dividends has a significant relationship with the variables of debt ratio, company's stock turnover and growth opportunity, but it has no significant relationship with the variables of the company's free cash flow and institutional ownership. In addition, it was concluded that abnormal return has no significant relationship with the time of dividend increase. Also, the findings showed that there is a significant relationship between time and abnormal return in the regression method, but the consolidated data method does not confirm this finding.

    Key words: abnormal return, debt ratio, growth opportunity, stock turnover, institutional ownership, free cash flow. It is paid to shareholders. Cash dividend distribution is the oldest and most common way of transferring returns from companies to shareholders. The management of the company must always make a decision regarding the retention or distribution of all or part of the cash dividends. As long as there are investment projects with returns that exceed their required costs for the company, the company will use retained earnings to finance them, and if any earnings remain after financing all the company's investment opportunities, these earnings will be distributed to shareholders in the form of cash shares. It is obvious that if the company's investment opportunities are more than its earnings, the institution will use the issuance of new shares or borrowing or a combination of both to finance them.

    1-2 Statement of the problem

    Just as the flow of cash within a company is of great importance to evaluate its power and liquidity status, naturally, the cash dividend of each share is also one of the sources of creating liquidity for the stock holder. People are of special importance. Apart from this issue, the cash dividend of each share somehow contains its own message to the market. In financial literature, this phenomenon is known as "messaging effect" or sometimes "information content effect". According to this concept, companies increase their cash dividends only when they expect an increase in future profits, otherwise the increased cash dividends should be reduced to their original level. Therefore, an increase in cash dividends carries a message to the market that the company's performance is expected to improve (Aharony and Swary 1980). For this reason, listed companies try to gain more profit by increasing their activities and by adopting the best dividend policy, they increase the wealth of shareholders. Following the announcement of the dividend, the stock price reacts to this news. The reason for this price change is the informational content of the dividend news. Informational content means the market's interpretation of the company's dividend policy. There is usually a series of company news that shareholders are unaware of. Therefore, the shareholders are looking for a clue to understand what is happening in the company, and one of these clues is the news about the dividend.Because companies usually follow a stable policy of dividend distribution and are reluctant to reduce their dividend and if the company's profit reaches a higher level, they may increase the amount of their dividend. (Khosh Taynet and Hajian 87) The reverse of this article is also true in the case of companies that reduce their dividends. 1-4 Research Objectives In the current research, the market reaction to dividends is investigated and the factors affecting abnormal returns in the period when dividends increase or decrease are investigated. The meaning of market reaction is the reaction of securities prices to new information. Therefore, the purpose of this research is to identify the importance and severity of the market reaction to the increase or decrease in cash profit. Another goal of this research is to identify the trend of investors' preferences over time to receive cash dividends, which is done by examining the abnormal returns due to the increase or decrease in dividends. Also, in this study, the factors that can affect the intensity of the market's reaction to dividends are examined. Among the factors investigated in this research, the following can be mentioned:

    The presence of institutional owners in the company

    The level of the company's debt ratio

    The amount of free cash flows

    The existence of growth opportunities in the company

    The liquidity of the company's shares

    1-5- Research users

    This research is for all groups involved in financial decisions including It will be useful for investment institutions, potential and current investors, company managers, Tehran Stock Exchange Organization, as well as researchers and students of finance and accounting fields.

    1-6- Research questions

    Is the change in dividends effective on abnormal stock returns?

    What are the factors affecting the relationship between dividends and abnormal stock returns?

    Does the market react to changes in dividends over time? Will it decrease?

     

    1-7 research hypotheses:

    Hypothesis 1: The market reaction to the increase of dividend is positive

    Hypothesis 2: The market reaction to the decrease of dividend is positive

    Hypothesis 3: For companies with high cash flow, the market reaction is more towards the increase of dividend.

    Hypothesis 4: For companies with high cash flow, the market reaction to The decrease in dividends is greater. Hypothesis 5: The market reaction to the increase in dividends in companies with higher institutional ownership is lower. Hypothesis 6: The market reaction to the decrease in dividends in companies with higher institutional ownership is lower. Hypothesis 7: The market reaction to the increase in dividends is stronger in companies with a high debt ratio. Hypothesis 8: The market reaction to the decrease in dividends in companies with higher debt ratios. have high debt, it is stronger.

    Hypothesis 9: The market reaction to the increase in dividends is greater in companies that have little growth opportunities.

    Hypothesis 10: The market reaction to the decrease in dividends is greater in companies that have little growth opportunities.

    Hypothesis 11: Companies with better stock liquidity have a lower market reaction to the increase in dividends.

    Hypothesis 12: Companies with better liquidity. Stocks have a lower market reaction to the increase in dividends. Hypothesis 13: The market reaction to the increase in dividends has decreased over time. Hypothesis 14: The market reaction to the decrease in dividends has decreased over time. takes over The time domain of this research includes a ten-year period from 1379 to 1388, and its spatial domain is the Tehran Stock Exchange and the companies accepted in this market.

  • Contents & References of Investigating the information content of dividends and factors affecting the market's reaction to the increase in dividends in Tehran Stock Exchange

    List:

    Table of Contents

    Page Title

    Chapter One: Research Overview. 1

    1-1- Introduction. 2

    1-2- statement of the problem. 2

    1-3- The importance of research. 2

    1-4- research objectives. 3

    1-5- Research users. 4

    1-6- Research questions. 4

    1-7- research assumptions. 4

    1-8- Research area. 6

    1-9- Definition of words and terms. 6

    1-10- Type and method of research. 6

    1-11- research limitations. 7

    1-12- Summary. 8

    Chapter Two: Theoretical foundations and research background. 9

    2-1- Theoretical foundations of research. 10

    2-1-1- Introduction. 10

    2-1-2-factors affecting the determination of dividend distribution policy. 10

    2-1-3- Profit sharing methods. 12

    2-1-3-1 Payment of cash interest. 13

    2-1-3-1-1- Distribution of fixed and certain amount between shareholders. 13

    2-1- 3-1-2- Percentage distribution of fixed interest. 13

    2-1-3-1-3- fixed profit sharing policy plus variable margin. 14

    2-1-3-1-4- Surplus profit distribution policy. 14

    2-1-3-2- bonus shares. 15

    2-1-3-3- Splitting shares. 15

    2-1-4- Why do companies distribute dividends? 16

    2-1-5-Profit sharing policy in the real world. 17

    2-1-5-1- Dividend policy in America 17

    2-1-5-2- Payment of dividend outside of America 18

    2-1-6-Legal provisions regarding dividend. 19

    2-1-7- Different views on the dividend payment policy. 21

    2-1-7-1- traditional theory. 22

    2-1-7-2- Walter model. 24

    2-1-7-3-Gordon model. 25

    2-1-7-3-1- Revised Gordon model. 27

    2-1-7-4- Modigliani and Miller theorem. 27

    2-1-7-5- Radical Theorem. 28

    2-1-7-6- recent theoretical developments. 29

    2-1-8- Major points in profit sharing policy. 30

    2-1-8-1- Information asymmetry. 30

    2-1-8-2- Representation problems. 31

    2-1-8-3- Institutional restrictions. 31

    2-1-8-4- Property transfer. 32

    2-1-8-5- transaction costs. 32

    2-1-8-6- behavioral issues. 32

    2-1-8-7- Tax considerations and share redemption. 33

    2-1-8-9- The reason for this study. 34

    2-2- Research background. 35

    2-2-1- Information asymmetry and marking. 35

    2-2-2- Agency fee. 41

    2-2-2-1- The basic model of representation. 42

    2-2-3- Dividend customer models. 46

    2-2-4- Behavioral financial explanations for profit sharing. 49

    2-2-5- The research done in Iran. 51

    2-2-6-Basics of developing hypotheses 53

    2-2-6-1- Informational content. 53

    2-2-6-2- The level of free cash flows. 54

    2-2-6-3- Institutional ownership. 55

    2-2-6-4- debt level. 56

    2-2-6-5- Tobin company's q ratio. 57

    2-2-6-6 Liquidity of the company's stock market. 57

    2-2-6-7- Market reaction over time. 58

    Chapter three: General and research plan. 60

    3-1-Research method. 61

    3-2- Statistical population and statistical sample. 62

    3-3- Research variables. 65

    3-3-1- Market reaction. 65

    3-3-1-1- abnormal yield. 65

    3-3-1-1-1-adjusted market model. 65

    3-3-1-1-2-market model. 65

    3-3-1-1-3-CAPM model. 66

    3-3-1-1-4- Fama and French model. 66

    3-3-1-2- Use of adjusted market model. 66

    3-3-1-3- Reasons for using the adjusted market model. 67

    3-3-1-4- Abnormal return. 68

    3-3-1-5- Cumulative abnormal return. 69

    3-3-2- Percentage change in cash profit. 69

    3-3-3- Free cash flow. 69

    3-3-4- Ratio of debt to equity. 71

    3-3-5- Liquidity. 72

    3-3-6- Institutional ownership. 72

    3-3-7- Growth opportunity. 73

    3-4- Data collection tools and methods 74

    3-5- Data and information analysis method. 74

    3-5- 1-Linear regression. 74

    3-5-1-1-camera test - Watson. 75

    3-5-1-2-Checking the normality of errors 75

    3-5-1-3- Collinearity test. 76

    3-5-1-4- Solutions to fix collinearity. 76

    3-5-2-76

    3-5-2- Estimation through consolidated data method. 77

    3-5-2-1- Advantages of using panel data. 78

    3-5-2-2- Balanced and unbalanced consolidated data. 79

    3-5-2-3- The general model of tabular data. 79

    3-5-2-3- Estimation of fixed and random effects. 81

    3-5-2-5- Identifying the use of fixed effects or random effects method. 85

    3-5-2-5-1- F test (test of equality of width from origins). 85

    3-5-2-5-2- Hausman test: choosing between fixed or random effects. 87

    3-6- Summary. 88

    Chapter Four: Data Analysis Method 89

    4-1- Introduction. 90

    4-2- Descriptive statistics. 90

    4-2-1- Variables used. 90

    4-2-2- The frequency of the investigated companies. 91

    4-2-3-Descriptive statistics of each of the variables 91

    4-3-Checking regression assumptions. 92

    4-3-1-collinearity test. 92

    4-3-2-testing the independence of errors 93

    4-3-3-checking the normality of the distribution of residuals. 93

    4-4- hypothesis test. 94

    4-5- Hypothesis test results. 95

    4-5-1- Testing the first hypothesis. 95

    4-5-2- test of hypothesis 2. 96

    4-5-3- test of hypothesis 3 and 4. 97

    4-5-4- test of hypothesis 5 and 6. 97

    4-5-5- test of hypothesis 7 and 8. 98

    4-5-6- test of hypotheses 9 and 10. 99

    4-5-7- test of hypotheses 11 and 12. 100

    4-5-8- test of hypotheses 13 and 14. 101

    4-6-conclusion. 101

    Chapter Five: Conclusion and suggestions. 103

    5-1- Introduction. 104

    5-2- The results of research questions and hypotheses. 104

    5-2-1- The results of the first and second hypotheses and comparing the results with other researches. 105

    5-2-2- The results of the third and fourth hypotheses and comparing the results with other researches. 106

    5-2-3- The results of the fifth and sixth hypotheses and comparing the results with other researches. 106

    5-2-4- The results of the seventh and eighth hypotheses, comparing the results with other researches. 107

    5-2-5- The results of the ninth and tenth hypotheses and comparing the results with other researches. 107

    5-2-6- The results of the 11th and 12th hypotheses and comparing the results with other researches. 107

    5-2-7-The results of the 13th and 14th hypotheses and the comparison of the results of other researches. 108

    5-3- Practical suggestions. 108

    5-4- Suggestions for future research. 108

    Appendixes 110

    Resources. 118

    Sources:

    Persian sources:

    Azer, Adel (1373). Statistical explanation of assumptions in management and behavioral researches, Danesh Management, (26), pp. 28-39

    Flatoni, Abbas (2016). Investigating the relationship between dividends, book value and dividends with the market value of shares of companies listed on the Tehran Stock Exchange, Master's Thesis, Tehran: Shahid Beheshti University.

    Amini, Sirvan (2012). Investigating the effect of corporate management on stock prices, master's thesis, Shahid Beheshti University, School of Management and Accounting

    Bazargan, Abbas, Sarmad, Zohreh, Hijazi, Elaha (2014) Methods of Realization in Behavioral Sciences, Tehran: Aghah Publications.

    Bashiri, Jafar (2015). The effect of liquidity status on profit distribution in joint-stock companies (textile industry), master's thesis, Mazandaran University of Science and Technology

    Pourhaidari, Omid; Ghasemian Ghasfi, Ali (2008). Investigating the relationship between the changes in operating capital flows and the changes in dividends according to the special characteristics of companies in the Tehran Stock Exchange, Accounting Advances, 2, 39-66

    Pouriansab, Amir; Talana; Abdul Reza. (1373). Dividend policy and stock valuation, Financial Research, 4, pp. 81-103

    Jehankhani, Ali and Asadi Morteza (1374). Examining stock price changes after dividend distribution, Financial Research, No. 7 and 8, pp. 119-105

    Jahankhani, Ali; Ghorbani, Saeed (1384). Identifying and explaining the factors that determine the dividend policy of companies admitted to the Tehran Stock Exchange Organization, financial research, 20, pp. 27-48

    Khodayari, Mohammad, research on the effect of changes in cash dividends on balance sheet composition, master's thesis, University of Tehran, 2016

    Khajawi, Shekrale; Al-Hiari Abhari, Hamid (2015).

Investigating the information content of dividends and factors affecting the market's reaction to the increase in dividends in Tehran Stock Exchange
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