Dividend announcements and share prices Essay Example | Topics and Well Written Essays - 2000 words

Dividend announcements and share prices - Essay Example The term signaling is commonly used in economic analyses. It refers to "the idea that one party (termed the agent) conveys some meaningful information about itself to another party (the principal)." ("Signaling", 2006) Also, signaling is based on the principles of asymmetric information. This says that, "In some economic transactions, inequalities in access to information upset the normal market for the exchange of goods and services." ("Signaling", 2006) In such a situation the signaling hypothesis says that, two parties could get around the problem of asymmetric information by having one party send a signal that would reveal some piece of relevant information to the other party. As mentioned, dividend announcements are one way by which information is conveyed to investors as well as to the market. The information content of dividend announcements has long been explored by various researchers and analysts. Moreover, various studies have been conducted to determine how dividend announcements affect the price of the shares of the company in the market. Different theories have been created to explain how certain factors affect the information content of dividend announcements and how effect that such information may have on the stock prices. The subject of the information content of dividend announcements warrants research for it affects several parties. For one, investors and shareholders are directly influenced by the stock prices of shares. Also, previous research has suggested that when dividend announcements are made, abnormal returns are seen especially during the period surrounding the announcement. (Starks, 2004) In this paper, one area of dividend announcements will be explored. Particular focus will be given on the size effect or the effect of the size of the firm on the abnormal returns that are seen when dividend announcements are made. This research will concentrate on the size effect as made evident in the Australian stock market. By conducting such analysis, this research will be able to answer the following research question: What is the effect of dividend announcements on asset prices Theoretical Framework This research will follow the methodology utilized by Mozes and Rapaccioli (1995). Their study aimed to determine the role of dividends in explaining the size effect. The said study is a follow up on past researchers that have been conducted wherein it was discovered that, on average, the firm's security price increases around its announcement of an increase in dividends or a special dividend. Moreover, previous researches have shown that the converse likewise holds. This means that a firm's security prices tens to decrease when an announcement of a decrease in dividends or a discontinued dividend is made. Also, past studies have shown that reactions to dividend changes are greater for small firms than for large firms. Using empirical analysis, the study of Mozes and Rapaccioli (1995) aimed to investigate "the extent to which dividend announcements affect the relation between firm size and the amount of information provided by earnings announcements." However, since this research does not concern itself with earnings announce