Stock Price Reactions to Dividend Announcements: Evidence from Emerging Markets

This paper investigates stock market reaction to dividend announcements across emerging markets (Russia, Turkey, and South Africa) throughout 2005-2019. Results lend support to signaling hypothesis: higher (lower) than expected dividends are associated with positive (negative) cumulative abnormal returns. Findings demonstrate that dividend surprise specification (when announcements are differentiated based on dividends deviation vs. consensus) performs better than naïve expectations approach (when events are classified into “good” and “bad” based on dividend changes vs. prior year payment) for measuring signaling effect. Examination of the relation between dividend changes and future earnings confirms that dividend announcements convey information about future profits to the market, but annual and annualized dividends cannot be a reliable indicator of future earnings changes under “event window” methodology. Finally, analysis of determinants of stock price reaction to dividend announcements shows that factors shaping dividend policy also influence stock market perception of dividend declarations.