Stock market reaction to dividend surprises: evidence from the emerging markets of Russia, India and China

Abstract

The present research aims at empirically investigating average reactions of emerging markets of Russia, India and China to dividend surprises on the post-crises period 2010-2014. Traditionally, unexpected dividend component has been measured in relation to the “naïve” model, which assumes that market players expect dividend levels to remain the same from one time period to another. The study proposes different, rarely applied in the dividend announcements literature analysts’ expectations-based approach to measure unexpected component of a dividend announcement. As a proxy for dividend surprise the difference between the actual dividend and the consensus analyst forecast is used. The research was conducted using event study methodology on the three separate samples of Russian, Indian and Chinese public companies, which regularly pay dividends. Obtained results of the study provide the grounds to make conclusions about the fact that Russian market on average reacts negatively to both good and bad dividend surprises; good dividend surprises on average trigger positive abnormal returns on Indian stocks, whereas bad and no surprises are associated with negative reaction of Indian market; no significant reaction of Chinese market to any type of dividend surprises is observed. In the research the results are discussed from the point of view of markets efficiency, behavioral finance, state of the economies, as well as legislation. The results of the study are of practical importance from the point of view of making investment decisions by the players of the markets as well as from the side of the companies, which along with other factors should take into account market reactions when deciding upon dividend payments and enhancing their dividend policies.