Distribution of dividend is a form of return to the investors and is believed to have a significant impact on the share price. Some researchers believe that dividend announcement convey positive information about the future prospect of the firm, hence market react positively to dividend announcement as investors will take advantage to gain profit or abnormal return from this opportunity. In contrast, some studies show that market react unfavourably towards dividend announcement and several studies even proved that dividend payout is insignificant in affecting share prices. On the other hand, share repurchase is viewed as an alternative to dividend as a mean of distributing "profit" to the investors. Some researchers have even classified share repurchase as a type of dividend. In the past, a great deal of work has been done in the area of share price movement after dividend and share repurchase announcements. This paper attempts to examine the impact of dividend and share repurchase announcements on the market price of the share price in Bursa Malaysia.
2.1 REVIEW OF THE LITERATURE
A number of studies have been conducted to study whether the market price of share is affected significantly by the dividend announcement. Several theory related to the impact of dividend announcement on share price had been constructed, most notably being dividend relevance theory and dividend irrelevance theory. This theory suggested that investors are generally reluctant to risk and prefer to have return today than future share price appreciation. This theory also proposed that share price is not independent from dividend policy. Although this theory is rejected by a number of empirical studies from other researchers, however the actions of investors tend to prove that somehow there is relationship between dividend announcement and share price movement.
2.1.1 Dependant Variable (Share Price)
The share price of a firm indicates the value of a firm and wealth of the shareholders. Previous researches suggested that share price of a firm is affected by some factors like dividend announcement, taxation rate, fiscal policy and etc. Hence, share valuation by dividend model has been developed. This model suggests that the real share price today is the function of the future dividends. In other words, dividend payout tends to decide the "intrinsic value" of the shares. On the other hand, share repurchases have been used as an alternative to dividend by the financial managers. In other words, for the case in share repurchase, the intrinsic value of share should be the function of the potential share repurchases announcement in an efficient market. Although it is widely believed that dividend and share repurchase should have significant impact, either positively or negatively on share price, empirical evidences have found results in contrast to this. Hence, dividend irrelevance theory has been developed. In the banking sector of Bangladesh capital market, Ali and Chowdhury (2010) found that no strong evidence that share price reacts on the announcement of dividend. In the same time, Akbar and Baig (2010) found the same result in Pakistan market. Moreover, Malaysia share market is found to be inefficient (Kim & Shamsuddin, 2008). Hence, the relationship between share price and dividend announcements in Malaysia remains to be seen. This paper attempts to examine the impact of dividend announcements on the share prices in Bursa Malaysia.
2.1.2 1st Independent Variable (Dividend Announcements)
Retained earnings of a firm can be distribute out as dividend or retain for investment purpose depends on the decision of management of the firm. Distribution of cash dividend is a form of return to the shareholders and investors. Some researchers suggest that cash dividend announcement impose significant positive effect on share price while some researchers think the other way. There are also some researchers suggest that there is no relationship between announcement of cash dividend and share price. This paper has been reviewing on past literatures to have a clearer picture on this ambiguous relationship.
After years of development, the market of China has grown stronger and the Shanghai Stock Exchange (SSE) had emerged to be one of the largest and active market in Asia and even the world. The strong growing momentum of China market has successfully caught the attention of investors across the globe and the growing number of active participants in the SSE proved that. Apart, researchers from China and across the globe had also moved their sight into the market of China. Some empirical study proved that the movement of share price in the market of China is related to the dividend announcement. Chen, Nieh, Chen and Tang (2007) suggested that share prices react significantly positive to cash dividend announcement no matter there are increases or decreases in cash dividend. This proved that cash dividend is welcome by the investors. This finding is consistent with the finding of Chen, Liu and Huang (2009) who suggested that announcement of cash dividend imposed positive effect on firm's share price whether there are increases or decreases on cash dividend. However, they found that only the positive effect of cash dividend increases announcement fits the dividend-signalling theory. Their finding also suggested that high dividend yield stocks tend to experience higher positive abnormal return. Overall, the investors in SSE react significantly to dividend announcement as it is evident from the immediate change of the stock prices (Guang & Ahmed, 2010). They also support that investors react positively to dividend announcement and gain abnormal return from it. Apart, they suggested that there is no difference between announcement in cash dividend announcement and general cash dividend announcement as their finding shown that there is no outperform in abnormal returns due to cash dividend increases compare to abnormal returns due to general dividend announcement. Milonas , Travlos , Xiao and Tan (2006) suggests stock prices with small dividend yield tend to fall proportionally to the taxable dividend paid.
Al-Yahyaee, Pham and Walter (2011) study on the effect of dividend announcement on share price of firm listed on Muscat Securities Market (MSM) in Oman. Their finding suggested that dividend increases announcement convey positive information to the investors which results in positive share price reaction while dividend decreases announcement proved it the other way. Their finding shown that the share price react significantly positive to cash dividend increases announcement and significantly negative to cash dividend decreases announcement. The finding of their study is consistent with theories which stated that share price react significantly to dividend announcement is because of dividend announcement carry valuable information. However, their findings are in contrast with tax-based signalling theory, which propose that higher taxes on dividends relative to capital gains are a necessary condition in order for dividend announcement to be informative. They suggested that in a market with highly concentrated shareholding and limited information leakage, investors tend to evaluate the expectation and future prospect of the management of a firm through the dividend announcement. Stock market in Malaysia reacted positively to dividend increase announcement and insignificantly negative to dividend decrease announcement as investors would anticipate earlier (Jais, Karim, Funaoka & Abdin, 2009).
Dividend announcements imposed a positive effect on the share price and investors gain statistically significant abnormal returns around the announcement date in market of India (Thirumalvalavan and Sunitha, 2006). However, they found that this positive signalling existed for only one day, which means that market reaction to dividend announcement completed within a short period. Their finding is consistent with Mehndiratta and Gupta (2010) that investors do shift their security positions at the time of dividend announcement, implying that in there is a possibility of information content in dividend announcement during post announcement period. Their finding supports the Efficient Market Hypothesis (EMH) as their finding shown that dividend increases recorded higher positive abnormal returns in India. However, there is another study that EMH in semi strong form cannot be accepted in market of India as the market of India exhibits learning lags in incorporating value-changing information contained in dividend announcement about one and a half month of trading days after the event-day (Mallikarjunappa & Manjunatha, 2009). Taneem and Yuce (2008) suggested that the share price of firms listed on Bombay Stock Exchange (BSE) in India tend to move in the direction of the change in dividend and the investors prefer companies who are paying out higher dividends. Their finding are also strongly supportive on dividend signalling hypothesis which indicate that share price react significantly positive to increase in dividend payment and react negatively to decreases in dividend payment in India.
There is a sign of insider trading in market of Pakistan as positive abnormal returns are recorded before the dividend announcement (Mahmood, Sheikh & Ghaffari, 2011). Their finding suggested that the market of Pakistan is in line with the weak form EMH and there is a chance of arbitrage profit as their result shown that there is a positive return during post announcement period. However, Mubarik, Rashid and Zia-ur-Rehman (2010) proved it the other way, they study on the effect of dividend announcement on share price of firms in oil and gas marketing sector. Their finding suggested that the share price of oil and gas marketing sector react significantly negative to dividend announcement. In contrary, there is also study which suggested that cash dividend announcements have insignificant effect on share price in Pakistan (Akbar & Baig, 2010). They also found that the returns around the 41st day are mostly negative and they explained that this might be due to the tax effect of cash dividends. Their finding is consistent with Ali and Chowdhury (2010) which proved that there is no significant effect of cash dividend announcement on stock price in Dhaka Stock Exchange (DSE) in Bangladesh. They suggested that DSE is still in the manipulation and speculation stage, high activities of insider trading for short term gain lead to asymmetric information in the market and resulting in information convey by dividend announcement become ineffective.
Other than the market of Asia, the market of African countries has also starting to catch the attention of investors and researchers across the globe in recent years. Asamoah and Nkrumah (2010) suggested that there is no relationship between dividend announcements and share prices of firms listed on the Ghana Stock Exchange (GSE) in Ghana, as their result did not capture any positive abnormal returns during the dividend announcement period. Apart from this, they also suggested that GSE was not supportive in the semi strong form EMH as they found that all publicly available information did not incorporated into the asset prices in GSE. Meanwhile, Adelegan (2009) who studied the effect of cash dividend announcement on the share price of firms listed on Nigerian Stock Exchange (NSE) in Nigeria found that share prices do react positively to dividend announcement.
The stock market in European nations has long been a mature and active market, there are a large number of market participants in the European stock market and recorded a high daily trading volume. There is a statistically significant market reaction to dividend announcement especially during the announcement day in Athens Stock Exchange (ASE) in Greece (Dasilas & Leventis, 2011). Their finding suggested that stock price and trading volume tend to react significantly in the same direction as the dividend changes. They also suggested that the abnormal return on dividend announcement day can be explained by the factors of dividend yield and the percentage change in dividend. Their finding of Dasilas and Leventis (2011) agreed with them and they suggested that the abnormal return around dividend announcement dates might be due to the absence of taxes on dividends and capital gains. Cash dividends are significantly related to abnormal returns in a negative way after the announcement in Turkey due to the tax clientele effect (Kadioglu, 2008). His finding also proved that there is no information leakage as there is no significant relationship between cash dividends and abnormal returns prior to the announcement day. Al- Twaijry (2006) suggested that changes in dividends per share best suits in explaining stock returns in market of United Kingdom.
The stock price in United States (U.S) reacted in the direction as the dividend changes (Fracassi 2008). He suggested that positive stock price reaction to dividend increases in U.S is due primarily to the perception of investors that the dividend increases signalling higher future earnings, reduction of agency problems as manager receive higher earnings. Meanwhile, he explained that negative price reaction to dividend decreases can be explained as the transition of the market from a mature life-cycle stage to a decline stage which has higher systematic risk, as maintained by the Maturity Hypothesis. The abnormal returns around announcement of dividend increases in bear markets are larger than in bull markets in U.S (Below & Johnson, 1996). He explained that the information convey by announcement of dividend change vary with switch of market phase is due to the expectation of investors. Kaestner and Liu (1998) suggested that the stock price in U.S response significantly positive to changes of size of dividend payment announcement in both dividend initiations and specially designated dividend. Their finding also supports strongly the cash-flow signalling hypothesis. Their finding also suggested that the investors view the announcement of dividend as a source of information in evaluation of the future prospects of the firm. Apart, banks listed on NYSE, AMEX and NASDAQ in U.S experience significant negative abnormal returns around the announcement date of dividend cut (Bessler & Nohel, 1996). They suggested that the negative impact of dividend cut and other unfavourable information are larger on larger size banks compare to smaller size banks and non financial firms in U.S as larger banks might lose more corporate customers due to the lose in confidence following the announcement of dividend cut. Sheel and Zhong (2005) suggested that the cumulative abnormal returns of both lodging and restaurant firms listed on the stock exchange reacted positively to the announcement of dividend increase and the impact on lodging firms are stronger in relative to restaurant firms.
This paper had just discussed the impact of dividend announcement on share price fall under the theory of dividend relevance theory. Now, this paper intends to discuss it from the aspect of other theory named "Dividend Irrelevance Theory. The theory suggests that dividends are irrelevant in a perfect world where the value of the share or the value of the firm is determined. The theory implies shareholders own the retained earnings and the shareholders do no care whether the money is distribute out as dividend or use to invest as they will benefit either way through share price appreciation or receiving dividends. The theory also suggests that investors can always sell a few of shares that increase in value after investments by the firms if they need cash.
Ali and Chowdhury (2010) suggest that there is no evidence of relationship between share price and dividend announcement in Bangladesh due to insider trading in the market. Insider trading in the market resulting in the information adjusted to the share prices before announcement and consequently the dividend announcements do not carry any new information to the market. Their finding is consistent with Akbar and Baig (2010) as they found that share prices is insignificant to cash dividends in Pakistan. However, their finding suggests that there are negative returns on the 41st day and they explained this might due to the tax effect in cash dividends. Lee, Ejara and Gleason (2010) also found no significant relationship between share price and share repurchase in French. Chi, Lu and Tsai (2010) suggest that industries other than electrics industry in Japan have no major difference in average cumulative abnormal return reaction after declaration of share repurchase. Milonas et al (2006) found that on the ex-dividend day, the share price of non-taxable share in China falls by an amount that is not statically different from the dividend.
2.1.3 2nd Independent Variable (Share Repurchase
Announcement)
Share repurchase is an activity launch by the firm to buy back the shares from the shareholders at market or higher price. Share repurchase is also considered as a form of dividend as the shareholders will receive a return in form of cash as a compensation of giving up the ownership of shares. Some researchers suggest that announcement of share repurchase do have impact on the share price but some do not agree. Here, this paper would review on the works done by previous researchers regarding the impact of share repurchase announcement on the movement of share price.
The market responds the most significantly positive to share repurchases made by small and high book-to-market value firms in Hong Kong (H.K) (Zhang, 2005). His finding shown that repurchasing firms do not really exhibit superior abnormal return when they actually made share repurchases. However, the market of Hong Kong responded positively to share repurchases in general. Hatakeda and Isagawa (2004) who studied on the effect of share repurchase on the share price in Japan found that the share price of firms which announced share repurchase tend to fall prior to the announcement yet the price tend to bounce back significantly after the announcement is made. They suggested that the firms which experienced large decline in share price prior to the announcement were motivated to make a share repurchase. Meanwhile, a firm is also motivated to make changes to the articles of association to prepare for future repurchases in accordance with option hypotheses and undervaluation hypotheses after a smaller size of decline in share price. Their finding is supported by Hatakada and Isagawa (2004) who also suggested that group which executes share repurchase tend to experience a larger decline in share price in the pre-announcement period compare to the non-execution group. Chi et al (2010) suggested that if the purpose of the share repurchase is to protect the interest of shareholders and credit of corporate, then the share price will rise in response to the announcement of share repurchase. Their finding also suggested that electric industry in Japan tend to have the smallest cumulative abnormal return before and after the declaration of share repurchase. Thirumalvalavan and Sunitha (2006) suggested that share price do react significantly positive to announcement of share repurchase on the announcement day as positive abnormal return is found on the particular day in Indian Market. They suggested that the short term of positive signal imply that share repurchase is a mean of short term gain.
Lee et al (2010) suggested that the share price of firms in Germany and Italy experienced significantly positive reaction in response to announcement of share repurchase while the declaration of share repurchase in Britain tend to exhibit small positive abnormal return. However, they found that at 10% level, the open market share repurchases in Britain shown a significantly negative reaction to abnormal return. They suggested that this might due to the tax treatment in United Kingdom. The market participants in Sweden perceive the announcement of share repurchase as a signal of undervaluation by the management of firm as there is a positive abnormal return recorded after the declaration of share repurchase.
Louis and White (2007) suggested that share price is significantly positive related to the announcements of share repurchase in U.S. Their finding also has shown a positive relationship between long tern abnormal returns and pre-purchase earnings deflation. They suggested that declaration of share repurchase signalling undervaluation. Their finding is agreed by the finding of Bargeron, Kulchania and Thomas (2011) regarding that the share price has a significantly positive relationship with the announcements of share repurchase in U.S. Meanwhile, there is other kind of opinion by other researcher. Chi et al (2010) suggested that there is an evidence of market reacted negatively prior to announcement of share repurchases, and followed by a positive market reaction to the announcement.
2.2 REVIEW OF RELEVANT THEORETICAL MODELS
The dependent variable, share prices and determinants of share prices, namely dividend and share repurchases announcements are those normally used in previous literatures. Dividend policy has been one of the areas of corporate finance to be analyzed with a rigorous model (Kinkki, 2001). Hence, before this paper work out on the model, first it needs to identify the impact and explanations of different dividend and share repurchases policies.
2.2.1 Valuation of Share Prices
Modern finance has developed several models to value share prices. According to Drake (2010.), the basic premise of share valuation is that in a rational market, the value of the share today is the present value of all future cash flows that will accrue to the investor in the share. In other words, if a company is paying out dividend which is perceived as a future cash flow to the investors, dividend should be one of the major determinants in valuing the share prices. Indeed, the dividend valuation model is a basic tool in modern financial analysis to measure the value of share (Ghezzi & Piccardi, 2003).
The dividend valuation model calculates the intrinsic value of a firm based on the dividends the company pays its shareholders. The justification of this model is that dividends represent the actual cash flows going to the shareholder, thus valuing the present value of these cash flows represent the true value of the shares. However, this model does have limitation. It assumes that the company pays dividend in a predictable pattern (Drake, 2010).
2.2.2 Efficient Market Hypothesis
E.F Fama developed Efficient Market Hypothesis (EMH) theorem. The EMH, also known as the Random Walk Theory, is the proposition that current share prices fully reflected available information about the value of the issued firm (Clarke, Jandik & Mandelker, 2001). EMH suggested that when information arises, the news spreads very quickly and is incorporated into the prices of securities immediately, leaving no room for extra profit (Malkiel, 2003). Hence, it is wide believed that dividend and share repurchases announcements should be incorporated into the share prices and thus they are presumed to have a significant impact on the share prices. Basically, there are three forms of hypothesis under EMH, namely weak EMH, semi-strong EMH and strong EMH.
2.2.2.1 Weak Form EMH
Weak form EMH assumes that current share price is being fully reflected by past information only. Therefore, past price is the best predictor of the current price. This is the essence of the weak form EMH, which follows random walk theory (Kim & Shamsuddin, 2008).
2.2.2.2 Semi-strong Form EMH
According to Clarke et al (2001), semi-strong form EMH suggests that the all publicly available information reflected the current share prices. Public information comprises of past information, financial reports, financial situations, etc. In other words, an investor would not earn gain extra profit from publicly known information.
2.2.2.3 Strong Form EMH
Under strong form EMH, current share prices incorporated all existing information, which included of past information, public information as well as insider information. Hence, no investor shall gain above average profit from whatever situation since all the information is already reflected by the current prices.
2.2.2.4 Relationship between Dividend, Share Repurchases Announcements and EMH
Since dividend and share repurchases announcements are deemed as public information, they should be incorporated in reflecting the share prices according to EMH. Hence, they should have significant impacts on the share prices if the share prices follow EMH theorem. However, past literature suggested that Malaysia share market is found to be inefficient (Kim & Shamsuddin, 2008). Thus, the relationship between dividend and share repurchases announcements with share prices remain to be seen.
2.2.3 Dividend Policies
There have been a lot of literatures done on dividend policy, resulting in a large body of theoretical and empirical research. However, no mutual agreements have been reached between different studies and researchers often hold different opinions even though on the same empirical evidence (Al-Malkawi, Rafferty & Pillai, 2010). Indeed, many researchers have view dividend policy as puzzle. Black explained that "the harder it looks at the dividend picture, the more it seems like a puzzle, with pieces that just don't fit together (Kinkki, 2001). Hence, it is true that one of the most important decisions that a financial manager face is the payout decisions (Jong, Dijik & Veld 2003). Throughout the years, different studies have been conducted in the dividend payout decision, resulting in different dividend theories. Basically, these theories can be further classified into three main contradictory theories of dividends. Some researchers suggest that dividend payments increase a firm's value. Oppositions of this theory argue that dividend payouts reduce firm's value. Some studies even suggested that the impact of dividend payout is ambiguous, depending on the situation. The third theoretical approach states that dividends payout should be irrelevant (Al-Malkawi et al, 2010). As this paper is focusing on the impact of dividend announcement on share prices, the review on dividend policy will concentrate on the demand side of the dividend, which is from the perspective of investors.
2.2.3.1 Dividend Irrelevance
Miller and Modigliani famously developed this theorem, demonstrated that under certain assumptions of perfect share market, dividend policy would be irrelevant in affecting the share prices (Al-Malkawi et al, 2010). Perfect capital markets assume that there are no taxes, managers have the same information as investors, no transaction costs, investors and markets are rational, interest of managers and shareholders are aligned, etc (Servaes & Tufano, 2006). Under this circumstance, shareholders' wealth is not affected by dividend decision and therefore there would be no difference between dividends and capital appreciation (Al-Malkawi et al, 2010). Some empirical evidences support the dividend irrelevance hypothesis. In the banking sector of Bangladesh capital market, Ali and Chowdhury (2010) found that no strong evidence that share price reacts on the announcement of dividend. In the same time, Akbar and Baig (2010) found the same result in Pakistan market.
2.2.3.2 High Dividends Increase Share Value
The first view on the effect of dividend on share prices is that dividends increase the share value. There are some theories developed under this assumption, namely bird-in-the hand hypothesis and signalling effect.
2.2.3.2.1 Bird-In-The Hand Hypothesis
First proposed by Gordon and Lintner, bird-in-the hand suggests that investors prefer dividend over capital gains, hence high dividend tends to increase the value of share. In a world filled with uncertainty and imperfect information, investors prefer to receive "certain gain" from dividends rather than the "uncertain gain" from future capital appreciation (Al-Malkawi et al, 2010). Thus argument suggests that investors need to realize wealth in order to consume and therefore have a preference for dividends (Ben-David, 2010). As investors are presumed to be risk adverse and dividend gain is treated to be more certain than capital gain, increasing dividend payment may be associated with increases in share value.
2.2.3.2.2 Signalling Effect
Signalling theory was developed to explain positive abnormal returns following announcement s by firms of an increase in dividends (Bernhardt, Douglas & Robertson, 2005). Under this hypothesis, firms increase dividends to convey positive information about earning prospects. Hence, dividend is also viewed as forecast for future profitability (Harada & Nguyen, 2005). As investors have lesser information about the prospects of the firm than managers, the market will interpret a dividend payment as a signal of quality, which will create an incentive for the firm to under invest, so that more funds are available to signal quality (Servaes & Tufano, 2006). Signalling is an attempt to overcome the imperfection of asymmetric information (Baker & Smith, 2006). As firms will be reluctant to cut dividend to prevent negative signal to the public, any increase in dividend will be perceived as favourable policy by the investors. Hence, dividend increases are usually associated with positive share price changes in the capital market. Fracassi (2008) found positive stock price response to dividend increases is due primarily to the signalling of higher future earnings in NYSE, AMEX and NASDAQ.
2.2.3.3 High Dividends Decrease Share Value
Some studies have proved that high dividend payout is associated with negative share price changes as investors react negatively towards dividends. Example under this finding is tax-effect hypothesis.
2.2.3.3.1 Tax-Effect Hypothesis
The dividend irrelevance theory developed by Miller and Modigliani assumes that capital market is a perfect market without any possible tax effect. It has been developed based on the assumption that there is no difference in tax treatment between dividends and capital gains. However, in the real world taxes exist subject to the regulations of different markets. Hence, the existence of tax is said to have significant influence on dividend policy and the share prices (Al-Malkawi et al, 2010). Indeed, most of the countries taxed dividend more heavily than capital gains, thus investors should welcome lower dividend payout ratios (Lee, Liu, Roll & Subrahmanyam, 2006). Servaes and Tufano (2006) suggested that even if the tax rates for dividend gain and capital gain are the same, the payments of dividends have immediate tax effect. On the other hand, if dividend were not paid, but were reinvested to produce capital gain, the tax effect on capital gain will only arise when the shares are sold. Hence, the effective capital gain tax rate is actually lower than the statutory tax rate. Overall, tax-effect hypothesis suggest that investors would react less favourable towards dividend payment due to higher effective tax rate of dividend gains. Indeed, Kadioglu (2008) found that cash dividends have significant negative relationship with abnormal returns after the announcement due to tax clientele effect.
2.2.3.4 Mixed Effect of Dividend Hypothesis
While some researchers have argued that dividend causes positive impact on share prices and others argued that dividend payout causes negative impact, there have been empirical evidence that dividend announcement actually yield a mixed effect on the share prices. The reaction of share prices toward dividend decision is subject to the different context, for example different investors.
2.2.3.4.1 Clientele Hypothesis
Clientele of dividend hypothesis suggest that different investors react differently towards dividend payouts. Lee et al (2006) suggested that highly taxed investors should favour lower dividend payout ratios whereas investor in lower tax bracket would react positive towards high dividend payout. Indeed, Taiwanese shareholders are found to arrange themselves into dividend clientele where highly taxed investors tend to hold firms that pay no dividends while low taxed individuals tend to welcome dividend payout (Lee et al, 2006; Al-Malkawi et al, 2010; Servaes & Tufano, 2006).
While Lee et al (2006) have been discussing clientele hypothesis based on differential of tax treatment, Al-Malkawi et al (2010) further explained clientele hypothesis based on individual and institutional investors. Al-Malkawi et al (2010) suggested that institutional investors tend to favour high dividend because they have relative tax advantages over individual investors. These institutions are also often subject to restrictions charters, for example, preventing them from investing in high risk stock which pays low dividends. Moreover, good quality firms prefer to attract institutional investors by paying high dividends because institutions are better informed than individual investors. Apart of this, risk adverse investors such as older investors are presumed to favour high dividend shares. On the other hand, risk taking investors such as the young individual investors are deemed to favour capital appreciation, hence react negatively towards dividend announcement (Ben-David, 2010).
2.2.4 Motives of Share Repurchases
Recent literatures suggested that the use of open market repurchases have increased dramatically since the last two decades and the total value of closed market and open market repurchase even exceed dividends in the US market (Lie, 2005; Renneboog & Trojanowski, 2011). Besides, NIKKEI is another market which have viewed share repurchases as a popular strategy among firms (Hatakeda & Isagawa, 2004). This paper intends to review the impact and reasons behind the growing popularity of share repurchases by firms in the capital market.
2.2.4.1 Signalling Hypothesis
According to Louis and White (2007), signalling is the most commonly cited explanation for share repurchases. Signalling hypothesis stated that "financial managers use share repurchase announcement to signal undervaluation of shares to the market. Share repurchase is seemed as conveying favourable information to the market about future performance of the firm (Lie, 2005). Hence, financial managers of firms have the incentives to repurchase when they view their shares as undervalued. Moreover, a share repurchase program normally associated with positive abnormal return even if the managers have no intent to signal (Louis & White, 2007).
Empirical evidence suggested that most of the time share repurchase exhibit significance positive impact on the share prices. Market participants view share repurchase as a signal of undervaluation, hence react favourably towards announcement of open market share repurchase (Thirumalvalavan & Sunitha, 2006; Lee et al, 2010). However, some researchers have found contradictory effect in some other markets. In United Kingdom, empirical evidence suggested that abnormal return tend to be negatively affected by the open market share repurchase announcement, most possibly due to tax treatment (Lee et al, 2010). Moreover, researches done in Japan market show that share price decline prior to share repurchase announcement and increase after the announcement (Hatakeda & Isagawa, 2004). Hence, the effect of share repurchase on share price is still ambiguous.
2.3 Proposed Theoretical Framework
The independent variable is defined as the variable that is varied or manipulated by the researcher whereas the dependent variable is the response that is measured in respect to the independent variable. An independent variable is the presumed cause (antecedent) while a dependent variable is the presumed effect (consequent). In other words, the behaviours of independent variable(s) affect the reaction of dependent variable. In a research project, independent variables and dependent variables are typically used to study the relationship between different variables.
2.3.1 Proposed Theoretical Framework for Relationship between Cash Dividend Announcements and Share Prices
Since the value of share is defined as the present value of future earnings (cash dividends), the proposed theoretical framework in this study is as following:
Dependent Variable
Share Price
Independent Variable
Dividend Announcements
The reaction of share price towards dividend announcements will be investigated through the theoretical framework above. Different period of share price will be examined to study the immediate effect, medium term effect and long term effect of dividend announcement on the share prices The event windows are set from t=-10 to t=10 whereby t=0 is defined as dividend announcement day.
2.3.2 Proposed Theoretical Framework for Relationship between Share Repurchase Announcements and Share Prices
Since the value of share is defined as the present value of future earnings (share repurchases), the proposed theoretical framework in this study is as following:
Dependent Variable
Share Price
Independent Variable
Share Repurchases Announcements
The reaction of share price towards share repurchases announcements will be investigated through the theoretical framework above. Different period of share price will be examined to study the immediate effect, medium term effect and long term effect of share repurchases announcements on the share prices The event windows are set from t=-10 to t=10 whereby t=0 is defined as share repurchase announcement day.
2.4 Hypothesis Development
Since this research is intends to study the different forms of dividends announcement have different impact on share prices. Therefore, there are three different independent variables that this paper is going to used and present each of it in three different alternative models. The three independent variables are cash dividend, share dividend and share repurchases. Hence, the hypotheses are being tested as the following:
2.4.1 Cash dividend
According to researchers like Chen et al (2007) and Fracassi (2008), announcement of cash dividend has a positive impact on the share price is due primary to the dividend signalling hypothesis that signalling of the higher future earnings. However, if based on the clientele effect, the company decrease its dividend, the investors who prefer on the high dividend, will tend to sell their stock and move to another company that pays a higher dividend. As a result, the company's share price will decline. While the other researcher, Blau and Fuller (2008) claims that dividend payments are negatively correlated with stock prices. Therefore, this paper hypothesize that there is a relationship between cash dividend and share price.
H0: There is no significant relationship between cash dividends announcement and share prices
H1: There is significant relationship between cash dividends announcement and share prices
The null hypotheses described that the cash dividend announcements and the share price is not significantly related with each other while the alternative hypotheses described that there is a significant relationship between the cash dividend announcements and the share price. This paper assumed that there is a relationship between both variable, hence, this paper rejected null hypothesis.
2.4.2 Share repurchases
Based on the researcher Lee et al (2010), the research shows that German and Italian share repurchases are met with a positive and significant share price response. Besides that, Thirumalvalavan and Sunitha (2006) found that shares repurchase announcements have shown positive and statistically significant abnormal returns around the announcement date. On the other hand, Lee et al (2010) suggested that the open market share repurchases announcement in the UK appear to be negatively and significantly at the 10% significant level related to abnormal returns, possibly due to tax treatment. This paper therefore hypothesize that there is a relationship between stock repurchases and stock price.
H0: There is no significant relationship between share repurchases announcement and share prices.
H1: There is significant relationship between share repurchases announcement and share prices.
The null hypotheses described that the share repurchases announcements and the share price is not significantly related with each other while the alternative hypotheses described that there is a significant relationship between the shares repurchases announcements and the share price. This paper assumed that null hypotheses were not true; hence reject it and indicating that there is a significant relationship between share repurchase announcements and share prices.
2.5 Conclusion
The studies on the impacts of cash dividend and share repurchase announcements on share prices have been the central of debating between researchers for decades. Numerous literatures have been carried out to study the relationship, yet the result is still inconclusive and ambiguous. Indeed, empirical evidences have proved that each school of thought has its own supporters, resulting in controversy of dividend theories. It is important to note that different market react differently to the dividend and share repurchase announcement, which helps to explain the controversy in dividend and share repurchase theories.
In chapter 2, this paper has reviewed the relevant theoretical models on the impact of cash dividend and share repurchase announcements on share prices. Reviewing on the relevant past literatures and theoretical models enables this paper to propose theoretical frameworks and develop hypothesis which are to be used to study the main objective of this paper. This paper intends to examine the impact of cash dividend and share repurchase announcements on share prices in Bursa Malaysia. The stated theoretical framework and hypothesis will be further tested and explained in Chapter 3 and Chapter 4 respectively.
