University of Greenwich

Business School

MSc in Finance & Financial Information Systems

2008-2009

Title of the Dissertation:

“DO DIVIDEND ANNOUNCEMENTS AFFECT THE STOCK

PRICES IN THE GREEK STOCK MARKET?

STUDENT:

SEREFIDIS THEOFILOS

(ID Number: 000538522)

SUPERVISOR:

Dr. S. Athianos

September 2009

1

Section TABLE OF CONTENTS page

Abstract…………………………………………………………………...3

1. Introduction............................................................................................4

2. Background information on the Athens Stock Exchange and the

Dividends Regime in Greece……………………………………………..6

3. Theories about the relevance between corporate dividend policy and

shareholders’ wealth……………………………………………………...7

3.1 The Middle of the Road……………………………………………………9

3.2 The Conservative Rightists........................................................................11

3.3 The Radical Leftists………………………………………………………16

4. Dividends and Taxes: “Clientele” effect..............................................18

5. The informational content of dividends and their signals to capital

markets…………………………………………………………………..22

6. Behavioural rationality of investors: the case of dividends…………..23

7. Dividend announcements and the Efficient Market Hypothesis……..24

8. Evidence of the Signalling Effect from different capital markets

globally………………………………………………………………….25

8.1 US Capital Market……………………………………………………......26

8.2 European Capital Markets………………………………………………..27

8.3 Asian Capital Markets……………………………………………………28

8.4 Other Capital Markets – the Greek Capital Market………………………30

9. Research Design and applied Methodology………………………….32

9.1 Sample and Data Selection……………………………………………….32

9.2 Hypothesis Development………………………………………………...32

9.3 Constructing the Event Study Window…………………………………..33

9.4 Raw Return Measures……………………………………………………35

9.5 Abnormal Return Measures…………………………………………...….35

10. Empirical Results………………………………………………...….36

11. Conclusions……………………………………………………...….63

2

References……………………………………………………………....65

3

DO DIVIDEND ANNOUNCEMENTS AFFECT THE STOCK PRICES IN THE

GREEK STOCK MARKET?

Serefidis Theofilos (ID Number: 000538522)

University of Greenwich, MSc in Finance & Financial Information Systems

Abstract

The reaction of the stock markets to dividend announcements by firms is a

financial issue, which has caused an intense debate between the academics, the

corporate officials and the shareholders of many companies for several years. The

current study attempts to examine the reaction of the Athens Stock Exchange (ASE)

to dividend announcements by a sample of firms negotiating on the indices

FTSE/ATHEX 20 and FTSE/ATHEX Mid 40 for a fixed period 2004-2008. It also

provides analytical information about the Greek Stock Market and the regulations that

underlie it, which have been taken into account in the present thesis. Moreover,

previous studies of important academic scholars are presented and discussed, in order

for the reader to attain the appropriate theoretical knowledge about the examined

issue. Finally, significant abnormal activity is documented throughout the multiple

event-windows that are employed and therefore, the null hypothesis, which supports

the irrelevance theory as introduced by Miller and Modigliani (1961), is rejected.

Keywords: Dividend announcements, stock prices, abnormal activity, Athens Stock

Exchange, signalling effect.

4

1. Introduction

There are numerous researchers, during the last decades, that have been

concerned in their papers the impact of the dividend announcements on the stock

prices. However, it is a matter of intense debate for the academics, the managers and

the shareholders of many companies for several years. The theories that have been

introduced by significant academics were essentially unable to terminate the above

mentioned debate, as the empirical results of various studies, in the most important

stock exchanges globally, concluded to different outcomes, supporting different

theories.

The main issue that occupied the mind of the financial economists was the

corporate dividend policy and how – if it affects the firm value and thus, the

shareholders’ wealth, as well as the existence of an optimal corporate dividend policy.

Lintner (1956) is considered to be a pioneer in the research of the relevance between

dividend policy and firm value. According to Lintner (1956), under the assumption

that capital markets are “imperfect”, the firms’ dividend policy plays a prominent role

in managements’ decision making and hence, in shareholders’ wealth. He claimed that

changes in corporate dividend policy may convey information to the market about

company’s current and future financial position; given that there are information

asymmetries between managers and investors (the former have information advantage

over the investors). Therefore, Lintner suggested that increases in the amount of

dividends that companies distribute to their shareholders lead to a positive market

reaction, while decreases in the amount of dividends lead to a negative reaction of the

stock prices. Similar outcomes about the reaction of the market to changes in

corporate dividend policy have been resulted from other important researchers as well

(Walter, 1956; Gordon, 1959; Gordon, 1962). On the other hand, Miller and

Modigliani (1961) postulated in their land-mark study the irrelevance between the

dividend policy a firm adopts and the value of the firm. In particular, they argued that

under the assumption that “perfect” capital markets with perfect certainty, no taxes

and transaction costs exist, dividend policy does not have any impact on the

shareholders’ wealth. Indeed, they suggested that managers can affect the firm value

only by changing the firm’s investment policy. Finally, a last group of researchers, the

most important of which were Brennan (1970) and Brennan and Thakor (1990),

declared that the corporate dividend policy is relevant as well as crucial to the value of

5

a corporation. Nevertheless, this group of academics claimed that an increase in

dividends has a negative effect on the stock prices due to the existence of taxation.

According to Brennan and Thakor (1990), most of a company’s shareholders prefer

dividend payments when distributions are small, while they prefer tender offer stock

repurchases when distributions are quite larger. The level of taxation seems to affect

stock prices considerably in many stock exchanges all over the world. The taxation

issue and the “clientele effect” will be discussed in a distinct chapter of the current

dissertation.

The aim of the current thesis – event study – is to investigate the reaction of

the stock prices to the announcements of dividends by Greek listed companies. It

applied the classical event study methodology used by Brown and Warner (1985), in

order to measure the abnormal returns of companies’ stock prices that occurred during

a fixed time period, before and after the day of the announcement (event day). The

sample consists of Greek firms listed on the Athens Stock Exchange (ASE), and more

particularly negotiating on the indices FTSE/ATHEX 20 and FTSE/ATHEX Mid 40.

FTSE/ATHEX 20 is an index dealing with the 20 largest blue chip companies on the

ASE, in terms of total capitalization, while FTSE/ATHEX Mid 40 is an index

comprises the next 40 listed companies that are classified as medium capitalization

companies on the ASE. The selected period refers to the 1st of January 2004 until the

31st of December 2008. It is a considerably important study, as it examines the

“dividend signaling hypothesis” in a capital market that is quite different from other

capital markets, in market capitalization, in the number and the size of listed

companies and in the regulations underlying it. Analytical information about the

Athens Stock Exchange as well as its special characteristics, having regard on the

amount of dividends that companies distribute, will be discussed in the next part of

the current study.

The rest of the dissertation is organized as follows. Chapter 2 introduces an

analytical background of the Athens Stock Exchange (ASE) and the regulations that

underlie it, in regard to the dividend amounts distributed by the listed companies.

Chapter 3 presents the most important theories that have been developed about the

relevance among the corporate dividend policy and the firm value. Moreover, chapter

4 provides extensively the “clientele effect”, the theory which assumes that stock

prices move accordingly to the aims and the demands of investors, in reaction to a

corporate policy and the taxation of dividend gains. Furthermore, chapter 5 discusses

6

the informational content of dividends and the signals they convey to the capital

markets. The behavioural rationality of investors is discussed in chapter 6, as it is

considered to be a very important issue, which has stimulated the interest of the

researchers for several years. Chapter 7 relates dividend announcements with the

efficient market hypothesis (EMH), an issue that firstly introduced by Fama (1965).

Finally, before presenting the methodology applied in the current event study, chapter

8 provides some of the most important empirical findings of various researches on the

largest capital markets globally.

In chapter 9 the applied methodology is presented, as well as the research

design of the present event study. Ultimately, chapter 10 demonstrates extensively the

empirical findings of the study, in order to support or to reject the developed null

hypothesis.

2. Background information on the Athens Stock Exchange and the Dividends

Regime in Greece

The Athens Stock Exchange (ASE) is considered to be a medium-sized

European capital market, quite smaller than the others in Europe, USA and Asia, in

terms of market capitalization, number of listed companies and trading volume. The

number of listed firms on the Athens Stock Exchange has reached the 350 at the

beginning of 2005. Its market capitalization witnessed an extraordinary upward slope

after 1995, having a remarkable growth since 1999, when the general index (ASEI) of

the ASE raised at historical levels. At this time, a lot of individuals invested their

savings on shares of stocks. However, a striking decline on the prices that began in

1999 and lasted until the middle of 2003, turned the dream of thousands of investors

into a nightmare (Dasilas, 2007).

As it was stated in chapter one, the current thesis aims to investigate the

reaction of the stock prices to the announcements of dividends by the Greek listed

companies negotiating on the indices FTSE/ATHEX 20 and FTSE/ATHEX Mid 40.

Although the Athens Stock Exchange is an emerging medium-sized stock market, it

seems to be an ideal candidate for this kind of study, due to some characteristics that

other stock exchanges do not have.

First of all, companies that have their shares listed on the Athens Stock

Exchange distribute dividends to their shareholders on a yearly basis, contrary to the

7

common practice of firms listed on many other developed stock exchanges

worldwide.

Secondly, the majority of the companies in Greece are individual-family

owned companies, and hence, they have a more concentrated ownership structure and

less information asymmetries between owners and managers. Therefore, the agency

costs are generally lower in Greek firms and thus, there is no motivation for the board

of directors to use the corporate dividend policy as a mechanism for monitoring the

managers, in order to avoid wasting capital in low-return investments (Jensen, 1986).

Thirdly, in Greece it is determined precisely by the law the minimum

percentage of net profits that companies have to distribute as dividends to their

shareholders. Anastasiou (2007) implied in his study that dividends in Greece are

proportional to earnings. In particular, companies have to distribute as cash dividends

the larger amount between the 6% of their equity and the 35% of their net profits

(Law 2190/1920). Nonetheless, the general assembly of shareholders can require the

lower amount to be distributed, taken for granted that the difference will be

capitalized and distributed as stock dividends in a subsequent financial year

(Asimakopoulos et al., 2007).

Finally, according to the Greek Law (2065/1992), dividends are not taxed both

at personal and at company level. Dividends are taxed only at personal level and

capital gains are not taxed at all. Therefore, the tax system in Greece does not impose

the double taxation on dividends that it is imposed on many of the biggest stock

exchanges all over the world, such as on the US capital market. Only a tax of 0.3% is

imposed on every transaction on the Athens Stock Exchange (Dasilas et al., 2008).

The above unique characteristic of the Greek Stock Market makes it quite attractive to

potential investors and an ideal case of study, as it allows examining the market

reaction to dividend announcements without considering the effects of double

taxation.

3. Theories about the relevance between corporate dividend policy and

shareholders’ wealth

The possible impact of corporate dividend policy on the price of a company’s

shares and, therefore on the shareholders’ wealth, is a significant issue of the financial

management that has puzzled the financial researchers throughout the last decades.

This issue is crucial not only for the corporate managers that seek to find the optimal

8

payout policy – if exists – for their companies, but also for the shareholders and the

potential investors that seek to find whether the decision of the corporate dividend

policy affects the current price of their shares. In order to interpret this matter and

answer to some basic questions that had been arisen, copiousness of theories has been

developed during the last fifty years. The current part of the present thesis aims to

introduce the most important of these theories about the firm’s dividend policy and

their empirical results, which keep on influencing the economists until today. It aims

for the reader to fully understand the theoretical basis of dividend policy, in order to

present on subsequent chapters the meaning of “information content hypothesis” and

the “dividends signaling effect”.

Brealey et al. (2006) suggested that investors can use dividends, in order to

separate a profitable company from a troubled one. They believe that “generous

firms”, in terms of cash dividends distribution, have reported high earnings at the end

of the respective financial period. As a result, investors may use dividend policy, in

order to learn about firms’ future prospects or other information that is available only

to corporate officials. Brealey et al. (2006) also claimed that the information that

dividends convey to the market is fairly reliable, as firms can overstate their earnings,

to enhance their financial position, only for a short period of time and not in the long

run.

To recapitulate, changes in corporate dividend policy can help market

participants to make presumptions about the firms’ future prospects. The question that

arises, however, is whether these changes in the payout policy can affect the value of

a firm or is just a signal of its stocks’ intrinsic value. The academic scholars that tried

to answer the previous question can be classified into three different groups,

according to the results of their researches. The first group, the so-called rightists,

asserts that increases in the payout ratio have a positive effect on the firm value. On

the other side, the so-called leftists declare that an increase in the dividend payments

lead to a decline in the stock prices, due to taxation issues. This group believes that

investors’ preferences do not centre upon high cash dividends, as they are imposed to

higher taxes, compared to capital gains. Therefore, they prefer firms to increase their

plowback ratios and retain their earnings, which are imposed to lower taxation. The

third party of theoreticians, who are placed in the “middle of the road”, asserts that

there is no relevance between the corporate dividend policy and the firm value. Thus,

9

changes – positive or negative – in the amount of dividends can not affect

shareholders’ wealth.

The figure below summarizes the three different groups of researchers, on how

changes in dividend policy affect the firm value.

3.1 The Middle of the Road

This group of theoreticians – supporters of the irrelevance theory – is mainly

represented by great academics, such as Modigliani, Miller, Black and Scholes, the

so-called middle of the roaders. Modigliani and Miller (M-M) had a profound

influence in the corporate capital structure theory, since they published their two land-

mark studies (Miller & Modigliani, 1958; 1961). Their first study (1958), based on the

assumptions of the “perfect” capital markets and the inexistence of taxation,

concluded that the firm value is not affected by the choice of the firm’s capital

structure. Thus, the firm value is irrelevant to the debt to equity ratio, which a firm

selects to adopt.

At this point of the study it is worth to present the assumptions that exist in the

“ideal world” of Modigliani and Miller. First of all, companies operate in “perfect”

capital markets. More particularly, in “perfect” capital markets all investors are

rational; the information is symmetrical and available to all market participants.

Therefore, everyone who participates in the capital markets has access to the same

information and shares the same expectations about the future prospects of the

10

companies. Furthermore, in “perfect” capital markets there are no transaction costs for

the buy or the sale of securities and no individual investor has the power to influence

the stock prices by buying or selling securities. Additionally, the companies’ net

profits are not imposed to any taxation. Moreover, companies are classified in risk

classes according to their business risk, and finally, the individual and institutional

investors can borrow and lend capital at the same interest rate that exists in the market

place, the risk-free interest rate.

Taken all the above into account, Modigliani and Miller (1958) revealed their

Proposition I: the value of the (i) company does not depend on its capital structure and

it is determined by the expected future return on assets (EBITi), discounted by a rate

of return (e) that is required by the shareholders and is the appropriate for the risk

class, which the company belongs. The mathematical expression of the above

proposition is depicted on the following formula.

))e

1( (EBIT Equity Debt Value Firm ,

Source: Miller, M., Modigliani, F., (1958), “The Cost of Capital, Corporation Finance and the

Theory of Investment”, The American Economic Review, Vol. 48, No. 3, pp. 261-297.

As a result, any increase in the firm’s debt is immediately offset by the increase in the

required rate of return by the shareholders, due to an increase in the amount of the

undertaken risk (M-M’s Proposition II).

Later on, in 1961 Modigliani and Miller stated in their ground-breaking study

that a firm’s value is not affected in any way by the adopted dividend policy by the

firm. They challenged the validity of the existence of an optimal payout ratio, by

suggesting that such a ratio – if exists – would be adopted by the managers of every

company, in order to maximize its stock value and hence, the shareholders’ wealth.

On the other hand, they declared that the amounts of dividends a company distribute

is where they are, in order to gratify their shareholders and because the corporate

officials do not believe that they can add to shareholders’ wealth by increasing or

decreasing the payout ratio. Instead, Modigliani and Miller pointed out in this article

that corporate managers can affect the firm value only by changing its investment

11

policy, which is considered to be its only determinant. These two studies by Miller

and Modigliani are extremely significant to financial theory, as they have influenced

several researchers later.

Another, essential study about the relationship between the dividend policy of

a firm and its common stock prices was accomplished by Black and Scholes (1974),

which challenged openly the “bird in the hand” theory by Graham and Dodd (1951)

that will be discussed in the next part of this thesis. They supported the irrelevance

theory demonstrated by Miller and Modigliani, as they found no significant

relationship between the corporate dividend policy and the shareholders’ wealth. They

argued that “the most correct manner to examine the impact of the dividend policy on

the firm value is to determine the effects of dividend yield on stock returns” (Black &

Scholes, 1974). Finally, Miller and Scholes (1982) provided empirical evidence about

the irrelevance between the dividend policy and the firm value that proposed by

Modigliani and Miller, by assuming, however, existence of taxation in dividends and

capital gains. Nevertheless, their research will be discussed comprehensively in a

subsequent part of the current thesis.

3.2 The Conservative Rightists

The above stated Modigliani and Miller’s argument entails that the value of

any firm is irrelevant to its corporate dividend policy. By saying “irrelevant” they

mean that all feasible payout decisions for the company are optimal (DeAngelo &

DeAngelo, 2004). Therefore, corporate officials can not change the shareholders’

wealth by increasing or decreasing its distributed dividends. However, a few years

before the publication of MM’s article, in the early fifties, a more conservative group

of important academic scholars, the so-called rightists, revealed their own view about

the relationship between the corporate dividend policy and the firm value. This party

of theoreticians believed that the firm value is positively related to the dividend

payments and hence, higher dividend payments can result in an increase to the

company’s stock price.

The first researchers that tried to demonstrate the above statement were

Graham and Dodd (1951). According to them, the only reason of companies’

existence is to pay dividends and thus, individual investors who evaluate and plan the

purchase of common stocks should take into account that companies with “liberal”

dividends are better than those with “niggardly” ones (Graham & Dodd, 1951). In

12

addition, institutional and individual investors seem to prefer stocks that pay high

dividends, because they consider dividends as “immediate spendable gain”, while

capital gains are considered as “additions to the existent capital”. Graham and Dodd

developed the following “traditional” model, as a standard practice for investors to

evaluate any common stock.

E)3

1(DMP ,

Source: Graham and Dodd (1951), as found at Walter, J., (1956), “Dividend policies and

common stock prices”, The Journal of Finance, Vol. 11, No. 1, p. 36.

where M is the multiplier, D is the expected dividend per ordinary share and E is

expected earnings per ordinary share.

Two years later, Harkavy (1953) demonstrated empirically that common stock

prices move at the same direction with the proportion of earnings distributed as

dividends. Therefore, all other things been equal, investors would pay a higher price

to purchase a stock that pays higher dividends from another that pays lower ones. On

the other hand, in the same article Harkavy (1953) implied that in the long run,

companies that distribute lower percentage of their earnings, having thus higher

plowback ratios, demonstrate finally the higher increases in their stock prices. This

statement applies in cases of small and developing companies that retain the higher

proportion of their earnings, in order to finance their expansion. However, it does not

apply at all events, as distributing low amounts of dividends and retaining high

proportion of earnings does not ensure a remarkable enhancement on the stock prices

in the future.

Based on Harkavy’s conclusion about the relationship between the common

stock prices and the proportion of retained earnings, James Walter (1956) is another

significant academic scholar belonging at the rightists’ party, who attempted to

develop a theoretical model, in order to explain the relationship between the different

corporate dividend policies and the firm value. His basic assertion, upon which he

based his theoretical model, is that in the long run the present values of expected

13

dividends are reflected on the stock prices. The Walter’s Model for the stock price

evaluation is illustrated below in a quantitative manner.

Rc

DE )(Rc

RaD

P

,

Source: Walter, J., (1956), “Dividend policies and common stock prices”, The Journal of

Finance, Vol. 11, No. 1, p. 32.

where D is cash dividend per ordinary share, E is earnings per ordinary share, Ra is

the internal rate of return on the investments and Rc is the market capitalization rate.

Walter’s Model was a revolution in financial theory and one of the most

important equity valuation models. By using the above equation Walter (1956)

investigated not only the relationship between the stock prices and the dividend

payout ratio, but also the relationship between the internal rate of return on additional

investments (Ra) and the market capitalization rate (cost of capital - Rc). However,

the former relationship is highly related with the latter one. Walter (1956) classified

the companies’ stocks as “growth”, “intermediate” and “creditor”, according to the

relationship between the rate of return and the cost of capital. According to his

assertion, when the internal rate of return is greater than the market capitalization rate

(Ra > Rc), then the stock price increases as the dividend payout ratio declines.

Therefore, corporate officials could maximize shareholders’ wealth only by retaining

the earnings and reinvesting them in the company, rather than by distributing them to

the shareholders. This is the case of growing companies, which have a lot of lucrative

investment opportunities (NPV>0) and have immediate needs of available cash. If

such a company distributes the earnings as dividends, it relinquishes lucrative projects

(Ra) and let the shareholders to invest the dividends in investments with lower rate of

return (Rc). The optimal payout ratio in this case is equal to nil and all earnings have

to be reinvested in the company.

Another category of stocks, according to Walter (1956), are the intermediate

stocks. Companies with intermediate stocks are characterized by medium to high

dividend ratios. In this case the internal rate of return is lower than the market

14

capitalization rate (Ra < Rc) and thus, the stock prices increase as the payout ratio

increases as well. In such a case it would be irrational for a company to retain its

earnings, without distributing them to the shareholders, as they have more profitable

investment opportunities (Rc) than the company has (Ra). The optimal payout ratio

for intermediate companies is 100%.

Finally, creditor stocks are those that are characterized by fixed dividend

payout ratios. In this case the internal rate of return is equal to the market

capitalization rate (Ra = Rc) and hence, the payout decision makes no difference to

the firm value. This case is accordant to the irrelevance theory suggested by

Modigliani and Miller (1961) and no payout ratio appears to be optimal for the firms.

The following figure summarizes the relation between dividend per share and

period of time, suggested by Harkavy (1953) and Walter (1956), illustrating the

dividend growth for two earnings reinvestment policies.

Figure 1.

Source: Bodie, Z., Kane, A., Marcus, A., (2009), Investments, McGraw-Hill – International

Edition, New York, p. 596.

Continuing presenting, in a chronological order, the results of the empirical

researches and the theoretical studies, Gordon and Lintner were another two important

theoreticians belonging in the conservative rightists’ group, who concerned in their

studies the relationship between the corporate dividend policy and the shareholders’

wealth. Firstly, Gordon (1959) implied that an investor by purchasing a common

15

stock, she actually buys its future price, hoping to be higher than its current one. He

also provided empirical evidence that its future price is related someway with the

expected dividend payouts and the expected earnings of the company. Therefore, he

demonstrated the relevance between the dividend policy and the stock prices.

However, he failed to fabricate at that time a theoretical model that links stock prices

and dividends, in order to support the results of his research.

In the early sixties, it was Gordon (1962) and Lintner (1962) who proposed the

so-called “bird in the hand” argument that came to be one of the most momentous

propositions of the rightists’ party. Gordon (1962) accomplished the construction of a

theoretical model that, contrary to Walter’s Model (1956), took into account the risk

incorporated in the stocks. He stated that current dividends are considered by the

investors to be less risky than the expected dividends and the future capital gains and

due to the low uncertainty, current dividends are discounted in the present with a

lower discount factor resulting in a higher stock value. The formula below illustrates

quantitatively the theoretical model developed by Gordon (1962).

,

Source: Gordon, M., J., (1962), “The Savings Investment and Valuation of a Corporation”,

The Review of Economics and Statistics, Vol. 44, No. 1, pp. 38.

where P is the stock price, E indicates the earnings per ordinary share, b is the

plowback ratio and hence, E * (1-b) = D, where D is the dividend per share, b * r = g

is the growth rate, and k is the rate of return required by the shareholders. Thus, the

stock value is equal to the ratio of current dividend and the difference between the rate

of return required by the shareholders and the growth rate of dividends.

It is quite straightforward from the above equation that Gordon (1962) based

his Model on Walter’s Model (1956). Additionally, he took similar assumptions to

Walters’, in order to construct his model. He assumed that companies can finance

their operations by using only their retained earnings. However, he dissociated his

rb-k

b)-(1EP

16

model from Walters’, as he assumed that companies can also use a stable debt to

equity ratio. Furthermore, he assumed that some of his model variables, such as b, g

and k would not be changed by the corporation in every future financial period. His

final assumption was that the model is valid only when the rate of return required by

the shareholders (k) is higher than the dividends’ growth rate (g). If future dividends

are expected to have a growth rate higher than the firm’s cost of capital, then the stock

price would tend to be infinite.

To conclude, the group of rightists comprises of major theoreticians who

suggested that there is a positive relationship between the corporate dividend policy

and the firm value, and constructed models that despite their shortcomings they have

managed to shed some light to the deep tunnel of the dividend puzzle.

3.3 The Radical Leftists

Contrary to what Modigliani and Miller (1961) and Black and Scholes (1974)

have said in their seminal works about the irrelevance theory, the group of radical

leftists, supporting the relevance theory, argued for a negative relationship between

the corporate dividend policy and the firm value, due to taxation issues. In particular,

they stated that whenever dividend payments are taxed more heavily than capital

gains, it is more beneficial for companies to transmute dividends into capital gains,

while the existing profit has to be either retained, or to be used in share repurchases.

Therefore, companies should adopt a very low payout ratio, in order to pay low cash

dividends, which results in lower tax payments. As regards to investors, they would

be satisfied to pay lower taxes, as “in cases where dividends are taxed more heavily

than capital gains, investor seek to purchase stocks with low dividend yields” (Brealey

et al., 2006).

The pioneer of this group of theoreticians and the most important of them is

Brennan (1970). He is considered to be a pioneer, as he was first developed the After-

Tax Capital Asser pricing Model, applied for differential corporate and personal taxes

(Litzenberger & Ramaswamy, 1980). The assumptions that Brennan (1970) based his

model are of great importance. He assumed that corporations and individual investors

can borrow and lend capital illimitably at the same interest rate which is equal to the

risk free rate of interest. Additionally, he assumed no restrictions on short sales and

that dividend payments are known precisely by the investors (Litzenberger &

17

Ramaswamy, 1982). Thus, the mathematical relationship that derives from the above

mentioned statements is the following.

)()RE( 00 rdcbr fift ,

Source: Litzenberger, R., Ramaswamy, K., (1982), “The Effects of Dividends on Common

Stock Prices Tax Effects or Information Effects?”, The Journal of Finance, Vol. 37, No. 2, p.

429.

where Rt is total rate of return on asset i before taxes, βi is the systematic risk, di is the

dividend yield and rf is the risk free interest rate. Brennan (1970) used this model in

his study to result that any increase in dividends causes a decrease in firm stock

prices, as investors do not have preference on dividend payments, except for the case

that taxes are inexistent.

Later on, Litzenberger and Ramaswamy (1979) developed a more extended

version of Brennan’s model by adding some constrains on unlimited borrowing by

individuals and corporations with risk-free rate. However, all other things that

Brennan assumed in his model were taken as given. The mathematical approach of

Litzenberger and Ramaswamy’s (1979) Model is the following:

)()RE( 111 rdcbr fiift ,

Source: Litzenberger, R., Ramaswamy, K., (1982), “The Effects of Dividends on Common

Stock Prices Tax Effects or Information Effects?”, The Journal of Finance, Vol. 37, No. 2, p.

429.

where α1 > 0 is the risk premium in a portfolio that has a beta equal to nil and a

dividend yield equal to the risk-free interest rate. The results of their research are

compatible with Brennan’s ones, although based on their altered assumptions about

unlimited borrowing constrains (Litzenberger & Ramaswamy, 1982).

Nevertheless, Litzenberger and Ramaswamy (1980; 1982) on their subsequent

articles argued that when there are restrictions on sales and the corporate dividend

18

policy is precisely known by the investors, there is a positive but not linear

relationship between the firm value and the dividend yields. Dividends can be

forecasted only by using information that is available to investors in advance.

It seems that there is no unambiguous conclusion derived from the above

discussed theories about the relationship among corporate dividend policy and firm

value. Far from it, the supporters of the three most important groups result in clearly

contradicting theoretical and empirical outcomes. Several recent researchers have

attempted to shed some light to the dividend controversy without giving, however,

any remarkable explanation. One of the academics’ major concerns all these years

was the role that taxation issues play in the decision of dividend policy by the

corporations. The next chapter of the current thesis deals with the relationship

between dividends and taxes and the so-called “clientele” effect, by presenting the

most significant studies, which have dealt with this subject.

4. Dividends and Taxes: “Clientele” effect

There are several financial academic scholars who dealt in the past, even in

separate studies, with the impact that taxes imposed on dividends have on the stock

prices and whether they can modify shareholders’ and investors’ preferences on stock

purchases. However, it seems that there is no coincidence of views even in this topic,

as the researchers that concerned with the “clientele” effect belong equally in the three

parties of theoreticians noticed above.

Although the economists who were involved in this matter belong in the three

groups as well, their studies are presented in the current chapter following a

chronological order. Modigliani and Miller (1961) are considered to be the first

economists who attempted to provide some insight in this matter. It is already known

that both authors are supporters of the irrelevance theory – middle of the road – and

stated that the value of a firm is not dependent in any way to its dividend policy. In

order to corroborate the validity of their theory, they assumed that capital markets are

“perfect” (costless access to information, no brokerage and transaction costs and no

tax differentials between dividends and capital gains), investors act rationally and are

perfectly certain about the future dividend policy of the firms. However, according to

Modigliani and Miller (1961), the only assumption that would barely diverge from

their theory is that there are no personal income taxation differentials between

dividends and capital gains. They suggested that in capital markets, where

19

imperfections at regard of taxes imposed on dividend and capital gains exist, investors

who behave rationally prefer to purchase stocks with high or low distributions with

reference to whether capital gains are taxed more heavily than dividends respectively.

Thus, the appearance of the “clientele” effect comes to be true.

In addition to the tax differentials between dividends and capital gains, market

imperfections comprise the existence of considerable transaction and brokerage fees,

as well as gaps between the interest rates. These imperfections are certainly not

consistent with the irrelevance theory suggested by Miller and Modigliani (1961).

“Clientele” theory claims that there is an inclination of dissimilar types of securities to

allure different types of investors, according to the dividend policy adopted by each

corporation. Hence, investors are not willing to purchase stocks with low dividend

payments, if capital gains are taxed more heavily than gains accruing from dividends

and when a company change its dividend policy, investors transform their stock

portfolio accordingly.

Few years later, Elton and Gruber (1970) made a quite important research,

resulting to outcomes consistent with Modigliani and Miller’s. In particularly, they

attempted fruitfully to determine the marginal shareholders’ tax brackets and their

relation – if any – with the corporate dividend policy, an issue that had not been

investigated till then, as well as the validity of the “clientele” effect, proposed by

Modigliani and Miller (1961). Their results demonstrated that shareholders’ tax

brackets are indisputably related with firm’s dividend payments, and consequently,

changes in dividend policy lead to changes in the firm value. Corporations having

high payout ratios would attract risk-averse investors from a comparatively low tax

bracket, who prefer a stable cash income from dividend payments. On the other hand,

growth companies, which need cash to finance their expansion in fruitful investment

opportunities, usually adopt more limited payout policies and attract investors who

belong in the high tax brackets, do not have immediate cash requirements, and hence

prefer capital gains over dividends.

Correspondingly, Black and Scholes (1974) supported in their article the

“clientele” effect. However, they postulated that the expected returns of high yield

ordinary stocks are the same with the expected returns of low yield ones, even

whether taxation exists. An investor, who has imposition of taxes, certainly adjusts

her portfolio to low-yield stocks and a “tax exempt” investor adjusts his portfolio to

high-yield securities. Nevertheless, both of them are not in the position to demonstrate

20

that these prompt adjustments add value on their portfolios. Therefore, the

independence between the dividend policy and the firm’s stock price is undoubtedly

supported.

Miller and Scholes (1978; 1982) published two successive studies in an

intense endeavour to examine the relationship between dividend policy and firm

value, under the existence of tax differentials between dividends and capital gains.

They concurred with Modigliani and Miller’s (1961) proposition that only investment

policy can affect the firm value, while changes in dividend policy can not provide

added value to shareholders’ wealth (Miller & Scholes, 1978; as found at Miller &

Scholes, 1982). In their subsequent research they attempted to use measures, which

subtract the tax burden from stocks that distribute dividends, in order to minimise in

the short-run the differences form the stocks that do not pay dividends (growth

stocks). However, they stipulated that such measures were not suitable for this reason,

as they provide biased results in the short-run, while in the long-run taxes do not

affect investors’ preferences for dividend policy, and hence irrelevance theory stands

true (Miller & Scholes, 1982).

Conversely, there were other researchers who investigated the impact that

dividend taxation has on the firm value, but their results were quite different from the

above mentioned results, since the former researchers belong either in the group of

rightists or in the group of leftists. Masulis and Trueman (1988) examined how

differential personal taxation affects the dividend and the investment policy of a firm.

They suggested that differential personal taxation can be harmful even for a company,

as shareholders who are differently imposed it have deviated opinions about the

optimal use of the internal funds in investment and dividend policies. More

particularly, shareholders in low tax brackets show a preference for high dividend

payouts and less reinvestment of the internal funds and vice versa for high tax bracket

shareholders. However, their model assumes that shareholders’ disagreement exists

when companies are not permitted to invest their internal funds in securities, but any

deviation of their views is shrunk when companies can invest internal capital in

securities.

In chapter three it was cited that Brennan (1970) was one of the most

important theoreticians and a pioneer of the radical leftists’ group. In a more recent

article of him about shareholders’ preferences among different cash distributions by

firms, Brennan and Thakor (1990) took into account the impact of taxation on realized

21

investors’ gains and implied that in spite of the differential taxation between

dividends and capital gains, shareholders, in an attempt to maximize their wealth, tend

to prefer cash dividends in cases of small distributions. For medium-sized

distributions they prefer shares repurchases by the company, while for large ones they

desire tender offer repurchases. Moreover, if the actual personal dividend tax is low,

then shareholders with small stakes of ownership would prefer cash dividends, while

shareholders with substantial participation in the firm’s ownership structure would

prefer a share repurchase.

In an attempt to scrutinize the dividend puzzle under the existence of taxation,

Bernheim (1991), a year later, published his article based on a model in which

dividend payments convey information to shareholders about firm’s profitability. He

assumed that although dividends are taxed more heavily, they are indistinguishable

with share repurchases. His results, which were consistent with the irrelevance theory,

revealed that the higher the dividend taxes, the lower the amount available for

distribution, without affecting the firm value at all.

Allen et al. (2000) questioned why companies continue to distribute dividends,

despite the fact that dividends are taxed more heavily than other forms of cash

distribution. In order to answer the preceding question, Allen et al. (2000) developed a

model, which classified investors as institutional and individuals and by taking into

consideration the “ownership clientele” effect, it attempted to investigate investors’

preferences. They stated that institutional investors have an indisputable preference to

dividends, and hence they are attracted by companies with high payout ratios.

Additionally, Allen et al. (2000) took in account the agency theory as well, by

suggesting that firms distribute dividends, in order to attract institutional investors.

Agency theory implies that institutional investors have generally greater incentives to

monitor the top managers, than the diffused small individual investors. Therefore, this

kind of ownership might have good effects on the financial performance of a company

(Barako & Tower 2007), and companies would like to magnetize this kind of

investors by distributing dividends, in order to sign a positive image outside.

To summarize, most of the above mentioned theories concluded that although

taxed dividends are in the position to change investors’ preferences, they can not

remarkably modify the firm’s stock prices. However, recent empirical findings

(mentioned in a subsequent chapter of the current study) report different results.

Anyway, as it was discussed in chapter one, dividends are not imposed to double

22

taxation in Greece, and thus it is assumed in the present event study that they would

not affect investors’ preferences.

5. The informational content of dividends and their signals to capital markets

In this part of the study it is worth to discuss about the various information

conveyed by dividends to market participants, the so-called “information content

hypothesis”, as well as the dividend “signalling effect”, which are extensively cited in

the financial literature. Modigliani and Miller (1961), in an attempt to bring together

the irrelevance proposition of their “ideal” world with the dividend policy, under

circumstances of uncertainty, introduced the informational content of dividends. They

suggested that dividends provide useful information about managers’ views of

company’s future profitability prospects. However, they also stated that a change in

the dividend policy is only the “handle” for a change on the stock prices and not its

cause.

He was Bhattacharya (1979) who reconciled in his study the Modigliani and

Miller’s information content hypothesis with the signaling effect. He assumed

existence of information asymmetries between outside investors and corporate

officials. In particular, he stated that managers have inside information that is not

available to outside investors and can be important if firm’s current investments

would have positive impact on its value. His model revealed that, in this case,

dividends serve as signals to investors about firms’ expected profitability.

Taking into consideration the valuable inside information about firms’ future

plans possessed by managers, Aharony and Swary (1980) named dividend

announcements as one of the various mechanisms that managers incorporate, in order

to signal information to market participants. According to the same authors, another

significant mechanism is the earnings figures. However, dividends offer more dubious

information than earnings, as their distribution is in managers’ discretion and can be

quite effortlessly manipulated by them.

Numerous other researchers suggested that dividends convey a substantial

amount of information to markets, when changes in dividend policies are observed.

Lintner (1962) provided empirical evidence that, in any case, managers in large firms

are likely to increase the payout ratios whenever they are convinced that future cash

inflows would be adequate to support the payments, and they decrease dividends

when they are not confident about the expected cash inflows. Watts (1973) applied

23

annual data to test the information content hypothesis, resulting to a positive, however

trivial, relationship between changes in future earnings and unanticipated changes in

dividends presently. On the other hand, Pettit (1972; 1976) used quarterly data to

conclude that the intrinsic value of any security can be accurately assessed by

evaluating the changes in dividend policies. His results are consorted with Lintner’s

proposition that managers hesitate to increase dividend payments before being certain

that the amount of expected future cash inflows would be sufficient to cover the

dividend distributions.

Definitely, the majority of financial researches concerning with this issue

conclude that dividend changes convey information to market participants, sometimes

beyond the information that has been already available by earnings figures.

Nevertheless, the main dispute between the academic scholars is whether market

participants comprehend the dividend signals and accordingly adjust their portfolios.

As noticed above, the group of rightists assumes a positive relationship between

changes in dividends and investors’ reaction, while leftists take for granted that

investors have a negative reaction to dividend changes, and finally, the middle of the

roaders presume no relevance between them.

6. Behavioural rationality of investors: the case of dividends

In the previous part, it was mentioned that one of the main disputes of the

researchers, concerning the information content hypothesis, is whether market

participants comprehend the dividend signals and adjust their portfolios accordingly.

Unquestionably, it is an issue that depends on the behavioural rationality of investors,

which has been occupied the mind of many researchers until nowadays.

Miller and Modigliani (1961) first introduced the concept of rational investors,

when they assumed in their seminal study that investors behave rationally when they

function in capital markets. Particularly, they stated that rational investors are those

who prefer to maximize their wealth than minimizing it, either by receiving high cash

dividends or by enjoying high capital gains. Miller (1986) developed an important

study, in order to demonstrate that “rationality-based models” are as significant as the

other economical and financial models. After classifying investors in institutional -

large investors - and individual - small investors -, he revealed that the behavioural

elements in decisions concerning dividend payments differ between institutional and

individual investors. More specifically, unlike institutional, individual investors carry

24

small amounts of securities and the majority of them do not count the experts’ advises

when they function in capital markets. He based his assumption in the fact that

individual investors do not view the purchase of securities solely as an immediate way

to maximize their wealth, but they relate securities with their families, their business

and other factors that financial models can not take into account.

Alternatively, he was Gordon (1959) who first established the so-called “bird

in the hand” argument. Gordon (1959) allied with Modigliani and Miller’s assumption

that investors behave rationally in capital markets, however, he implied that investors

generally show a preference in current cash dividends, as they consider being less

risky than future capital gains. Therefore, he dissociated his proposition from

Modigliani and Miller’s, suggesting that investors show a preference in the source

they use to maximize their wealth. He finally concluded that due to low uncertainty

that dividends involve, companies which distribute a high proportion of their earnings

tend to enjoy higher increases in their stock prices than those who adopt more

restricted dividend policies.

However, the “bird in the hand” theory has been challenged by several

researchers. One of those was Bhattacharya (1979), who called Gordon’s argument as

“the bird in the hand fallacy”. According to him, the low uncertainty of current cash

dividends is not a so important reason to convince the investors to show a preference

in current dividends against the future capital gains. Consequently, it is rather

straightforward that the behavioral rationality of investors is another issue of debate

between the financial scholars and there is no room for convergent views.

7. Dividend announcements and the Efficient Market Hypothesis

The “efficient market hypothesis” is an issue that firstly developed by Fama

(1965) and it has been the source for an incessant dispute in economic and academic

circles between its proponents and its rivals. Fama (1965) asserted that markets are

efficient when the current market prices of the securities reflect, without bias, all the

publicly available information. As a result, market prices reflect only information that

is available currently and not information that was accessible in previous economic

periods. In addition, it is impossible for any investor to use the publicly available

information, in order to outperform the market and to enjoy excess profits repetitively,

but only randomly. Moreover, Fama (1965) rejected the proposition that future

security prices can be predicted using past information and concur the theory of

25

“random walk”. According to “random walk” theory, security market prices have no

memory, and thus, their returns are independent of its overall past behaviour. Hence,

investors can not rely on past information, in order to precisely predict the future

behaviour of any security.

As regards to release of new information to participants of capital markets,

efficient market hypothesis asserts that any change in securities’ market prices must

be in reply to release of new information, which must be totally unpredictable.

Otherwise, if market participants are aware of the new information, they would have

already adjusted their portfolios according to this information (Bodie et al., 2009).

Harsh competition between investors, both individual and institutional, is considered

to be the main reason for the existence of “efficient” markets and does not allow any

security to be underpriced or overpriced. Capital markets incorporate all the essential

mechanisms, in order to immediately and without bias adjust any new information to

current market prices and give no room for “mispriced” stocks.

Taking all the above into consideration, dividend announcements are also

considered as releases of new information about the future prospects of a company.

Therefore, according to efficient market hypothesis they should instantaneously and

unbiasedly be adjusted and reflected on the current market prices (Pettit, 1972). In

contrast, Pettit (1972) implied that in “inefficient” capital markets stock prices tend to

show abnormal performance after the announcement of dividends by the companies.

The abnormal behaviour of the stock prices comes from the fact that it takes

substantial time for information to be adjusted on the stock prices. On the other hand,

abnormal security performance before the day of the announcement does not

automatically indicate an “inefficient” market. In this case, the market would be

inefficient only if some investors had the capability to predict precisely the

announcements that would be made and had taken all the necessary positions on their

portfolios.

8. Evidence of the Signalling Effect from different capital markets globally

In the previous parts of the current thesis different theories concerning the

relationship between corporate dividend policy and firm value have been discussed, as

well as the clientele effect and the information content hypothesis of dividend

announcements. In this part of the study it is considered worthy to examine the

26

empirical findings of different researches, which investigate the dividend signalling

hypothesis, as classified according to the market that the studies have taken effect.

8.1 US Capital Market

The US capital market is considered to be the biggest capital market in the

world, and thus, several researches regarding the information content hypothesis have

taken effect on this market. Watts (1973) was one the first who attempted to examine

the dividend signalling hypothesis on the US market. He partially rebutted Pettit’s

(1972) outcomes, as he stated that there is a positive relationship between changes in

future earnings and changes in the current amount of dividends that announced by the

firms. However, he implied that a small number of earnings’ changes were attributed

to unexpected dividend changes and hence, there is a positive while trivial

relationship, in contrast to Pettit (1972), who implied that investors use widely the

information content of dividend announcements.

Subsequently, in his successive article, Pettit (1976) tried to further investigate

the above issue, due to the contradictory outcomes of the two studies. By combining

and restructuring the two preceding models, he concluded that ultimately, dividend

announcements do convey information to participants of the US market, without

however determining the exact amplitude of investors’ reaction to this information.

The US capital market stimulated the interest of other important financial

economists as well, such as Black and Scholes (1974) and Aharony and Swary (1980),

and the outcomes of their studies have already been discussed in previous parts of the

current thesis. Few years later, they were Asquith and Mullins (1983), who examined

the effect of dividend initiations on the firm value. They found that dividend

initiations are connected with positive abnormal returns. The market reaction to these

announcements is larger than its reaction to future increases of dividend payments.

Therefore, the same authors concluded that both dividend initiations and later

dividend increases have a positive impact on shareholders’ wealth.

The previous part of the present thesis attempted to relate dividend

announcements with the efficient market hypothesis, introduced by Fama (1965).

Eades et al. (1985) were those, who endeavored to examine the US market reaction to

dividend announcements by concentrating on its timeliness and unbiasedness. They

focus to investigate whether participants of the US market react rationally to dividend

announcements. They concluded that market participants do not react rationally to

27

dividend announcements, as they are either pessimistic in estimating dividends or

optimistic in interpreting the informational content conveyed by their announcements.

However, dividends paid by firms on the US market are not always distributed

in a regular basis. DeAngelo et al. (2000) tested the dividend signalling hypothesis in

the case of special dividends paid by 942 NYSE firms. They stated that the majority

of the firms on the US market used to pay special dividends quite often, but nowadays

they rarely distribute this type of dividends. They indicated that special dividends are

paid by the companies as predictably as the regular dividend payments, in a way that

is difficult to distinguish the difference between them. In addition, they provided

empirical evidence that in spite of the general decline in the distribution of special

dividends by NYSE companies, very large firms keep on paying specials in a regular

basis. They finally suggested that the overall effacement of special dividends was not

the result of the increased share repurchases, as they can not serve as signaling

devices.

Nevertheless, there are studies concerning the US market that have challenged

the informational content of dividend announcements. Christie (1994) identified all

the reduction and omission announcements of dividends for a sample of firms listed

on the New York Stock Exchange (NYSE) and on the American Stock Exchange

(AMEX) for a period between 1967 and 1985. He provided evidence that future

dividends have completely no significant relation to market reaction. Therefore,

although studies which support the informational content hypothesis are by far more

than the challengers, the dividend signaling effect on the US market remains an

elusive issue.

8.2 European Capital Markets

Even though the largest firms in the world are listed on the US capital markets,

European capital markets, especially those in the UK, stimulated the interest of many

important academic scholars. According to Balachandran (1998), the UK capital

market has at least two basic differences compared with the respective ones in the

USA. Firstly, firms listed on the UK market usually pay dividends more frequently

than the US companies, and more particularly they usually pay twice per year.

Secondly, the tax treatment for companies listed on the UK market differs from the

corresponding treatment on the US markets. Balachandran (1998) stated that

“although the US has a traditional taxation system, the UK has an imputation system”.

28

Lonie et al. (1996) were from the first economists, who attempted to

investigate the dividend signaling phenomenon in a European capital market, using

UK data from a sample of listed companies on the London Stock Exchange. They

stated that in capital markets with information asymmetries, the market participants

try to explain correctly the managers’ announcements of dividends and earnings, in

order to make beneficial choices. Their results indicated that both dividends and

earnings announcements affect the share prices. However, they found that earnings

announcements have a more significant impact on them than dividend

announcements.

On the other hand, Abeyratna (1996) implied that the simultaneous

announcements of earnings and dividends are possible to interact with one another.

The possibility is even greater on the UK capital markets, where is a general practice

for firms to announce dividends and earnings on the same day of the economic year.

Therefore, the simultaneous signals of earnings and dividends may cause confusion to

market participants and possibly will make quite complex for them to decode the

conveyed information.

In addition, Balachandran (1998) scrutinized the dividend reductions in

accordance with the interim effect on the UK capital market. He provided empirical

evidence that the effect of dividend reductions on the firm value is quite significant

around the announcement date and leads to value declines. However, the reductions of

interim dividends have a more considerable impact on shareholders’ wealth than the

reductions on final dividends. According to the same author, the usual stability of

interim dividends and the managers’ reluctance to change them, compared to the final

dividends, are the main reasons for the market’s negative response.

8.3 Asian Capital Markets

The Asian capital markets have been emerged during the last two decades and

play an extremely important role in the global economic development. The most

important of the Asian capital markets and one the three largest markets globally is

the Japanese capital market. The above market has stimulated the interest of numerous

researchers, especially throughout the last decade, who attempted to examine the

effects of dividends announcements on the stock prices. However, the Japanese

market has some unique characteristics that have to be taken into account by the

sundry researchers. Firstly, the majority of the companies listed on the Japanese

29

market announce their dividends at the same time they announce their earnings as

well. Secondly, the firms simultaneously announce their forecasts for the next year’s

dividends and earnings figures. Thirdly, there are special analysts in Japanese market,

who make their own forecasts about the firms’ dividends few days before the

announcements. As a result, this kind of forecasts can be compared with the

announced figures, in order to observe the direction and the magnitude of the market’s

response.

Taken all the above characteristics of the Japanese market into consideration,

Conroy et al. (2000) examined the reaction of the market to 3,890 announcements of

Japanese companies for a period between 1988 and 1993. They suggested that stock

prices are affected in an important manner by the manager’s forecasts of the next

period’s earnings. On the other hand, they found marginal relevance, and not a

significant one, between the reactions of the stock prices and the announcements of

the current dividends, a result which is consistent with Modigliani and Miller’s (1961)

proposition about the irrelevance theory.

Moreover, Kato and Loewenstein, with a sequence of studies from 1995 to

2002, attempted to explain the dividend signaling effect on the Japanese market. Kato

and Loewenstein (1995) inspected the stock price behaviour around the date of the

dividend announcements for a sample of Japanese firms and found that the dividend

clientele effect seems to be trivial for the Japanese market. They are also the first

researchers, who identified the “fiscal-year-end effect” in an Asian market. According

to this effect, stock prices of Japanese firms appear to be pressured by selling forces

before the fiscal-year end, and by buying forces after the end of the fiscal year.

Furthermore, Kato et al. (1997) examined the market response to voluntary

announcements, an issue that appears in Japan contrary to what happens in the US

markets; it is not compulsory for Japanese firms to disclose any information about the

dividends before the announcement day. Kato et al. (1997) scrutinized that just as US

markets do, Japanese market react quite strongly to dividends announcements, since

market participants are actually interested to decode the information conveyed by the

dividend announcements about the firms’ financial future and take immediately the

appropriate actions. Their research has shown that the aggregate stock returns appear

to be positive, which denotes that managers are biased toward announcing optimistic

news. Nevertheless, unlike on the US markets, the announcements for no change in

the corporate dividend policy lead to extremely negative excess stock returns.

30

Therefore investors on the Japanese market have the “flair” to identify any managers’

bias including in dividend voluntary disclosures.

On the other hand their last study is in alignment with the above mentioned

study of Conroy et al. (2000). Kato et al. (2002) investigated the dividend policy of

firms in Japan and concluded to similar outcomes. They provided empirical evidence

that although the changes in corporate dividend policy may convey useful information

to market participants about the firms’ future cash flows; it is not used by the

managers as a device to control overinvestment problems, a result that challenges

Jensen’s (1986) theory about dividend policy, mentioned in chapter 2 of the present

study.

8.4 Other Capital Markets – the Greek Capital Market

Despite their limited size in terms of market capitalization and number of

listed firms, the capital markets of Greece and Cyprus have stimulated the interest of

several prominent financial researchers. In particular, numerous researchers have

examined the stock market response to changes in corporate dividend policy by firms

listed on those markets.

Beginning with the capital market of Cyprus, Travlos et al. (2001) investigated

the stock price reaction to announcements of cash dividend changes in the

environment of an emerging European market. In general, Travlos et al. (2001)

believe that firms operating in emerging markets have to adopt a payout policy based

on the special characteristics of the corresponding market, such as the market

microstructures and the tax treatment of the Cyprus-listed firms. The results of their

study demonstrated the existence of considerably positive abnormal returns associated

with the announcements of changes in the payout policy, results which are

conterminous with the information signalling hypothesis.

As it was mentioned in chapter 2 of the current thesis, the Greek stock market

is considered a medium-size one; however it seems to be quite attractive to potential

investors and an ideal case of study, as it allows examining the market response to

dividend announcements without considering the effects of double taxation.

Thereafter, the most essential studies concerning the Greek capital market will be

presented, in order for the reader to have a more integrated view about the Greek

market as well as its reaction to dividend announcements.

31

One of the first attempts to examine the dividend signaling hypothesis on the

Greek stock market was made by Papaioannou et al. (2000). It was a study that

analyzed the stock price response to dividend announcements for a sample of firms

listed on the Athens Stock Exchange. Their sample consisted of stocks traded on the

main segment of the ASE for a period between 1981 and 1994. Their empirical

findings seemed to be consistent with Modigliani and Miller’s irrelevance theory, as it

was not observed any significant abnormal return, as a result of the change in firms’

corporate payout policy, neither on the announcement nor on the ex-dividend day.

In addition, Asimakopoulos et al. (2007) explored the same hypothesis on the

ASE using a sample of listed firms, which distributed the lowest amount of dividend

required or above the lowest required amount. Their outcomes suggest that when the

listed companies on the ASE declared publicly the distribution of higher dividends

than the compulsory amount and when this increase was regarded by the market

participants as an unexpected one, then there was a negative stock price reaction.

Consequently, Asimakopoulos et al. (2007) implied that increases in dividends that

considered as unexpected changes in dividend policy convey “bad news” to the

market. However, the signaling effect does not apply for firms that pay only the

minimum required amount for dividends. Therefore, the results of their study are

consistent with the irrelevance theory about dividend policy.

Furthermore, Dasilas (2007) and Dasilas et al. (2008) examined the stock

market reaction on both final and interim dividend announcements on the Greek stock

market. Nevertheless, their findings are diametrically different form the results of

Asimakopoulos et al. (2007), as they found that positive changes in dividend policy,

and hence increases in the distributed amount of dividends, have a positive impact on

the stock prices, while decreases in the payout ratio lead to significantly opposite

results on the stock prices.

In conclusion, empirical findings supporting the three different theories of

dividend policy have been observed by the researchers in their studies concerning the

Athens Stock Exchange. The next chapters of the current thesis will present the

classical event study methodology that has been employed, as well as its empirical

findings.

32

9. Research Design and applied Methodology

As it was mentioned in the introduction, the current thesis employs the

conventional event study methodology, first applied by Brown and Warner (1985).

According to MacKinlay (1997), an event study is a statistical device which is used by

the financial researchers, in order to measure the economic effect that an “event” has

on the firm value, and hence, on the shareholders’ wealth. The main issue of an event

study is to determine the abnormal returns of the firm’s stock prices attributed to the

particular event being examined. MacKinlay (1997) implied that such a study has a lot

of advantages, as the impact of the event is instantly reflected on the stock prices,

taken for granted that market participants react rationally to new information

conveyed to the marketplace. In addition, event studies can be applied in many

sciences, especially in accounting and finance.

The classical event study methodology has been used by numerous academic

scholars, who tested the dividend signaling hypothesis on a particular capital market

(Brown & Warner, 1985; Abeyratna et al., 1996; Lonie et al., 1996; Travlos et al.,

2001; Asimakopoulos et al., 2007; Dasilas et al., 2008).

9.1 Sample and Data Selection

The sample of the current dissertation consists of 60 Greek companies, listed

on the Athens Stock Exchange (ASE). More particularly, the firms negotiate on the

FTSE/ATHEX 20 Index and the FTSE/ATHEX 40 Index. FTSE/ATHEX 20 is an

index comprised of the 20 largest blue chip companies in the ASE, in terms of total

capitalization, while FTSE/ATHEX 40 is an index which consists of the next 40 listed

companies that are classified as medium capitalization companies on the ASE. The

event study period will be from the 1st of January 2004 until the 31st of December

2008 and secondary data are used (daily closing stock prices and announced dividends

from 2004 to 2008), in an attempt to test the dividend signalling hypothesis on the

Greek capital market.

9.2 Hypothesis Development

In order to shed some light to the continual debate of the dividend signaling

effect, the current study attempts to examine whether the dividend announcements by

the listed firms on the ASE convey information to the marketplace that can be

evaluated by the investors and cause abnormal activity to the stock prices. The second

33

chapter of the present thesis presented analytically the three existed theories dealing

with the dividend policy and how changes in dividend policy affect the firm value.

Therefore, the current study aims to investigate the impact of the dividend

announcements on the value of the selected firms, taking into account the special

unique characteristics of the Greek stock market, in order to support one of the above

cited theories.

As a result, the null hypothesis that is tested by the current event study is the

following:

H0: Dividend announcements do not convey new information to the marketplace

and should bear no effect on the firm value.

i.e. No abnormal returns on the stock prices

In case of accepting the above null hypothesis, it means that there is no

significant abnormal activity by the stock prices during the examined period and thus,

the irrelevance theory introduced by Miller and Modigliani (1961) stands true.

Alternatively, in case of rejecting the null hypothesis, it means that statistically

significant abnormal activity – positive or negative – has been observed on the firms’

stock prices during the same period and hence, either the conservative rightists’ or the

radical leftists’ theory stands true.

9.3 Constructing the Event Study Window

Before constructing the proper event window, it is worth to determine the

event day of the analysis. It seems usual in many studies the event day to be called as

day 0. According to Papaioannou et al. (2000), in Greece there are five important

dates during the economic years related with cash dividends: (a) the meeting of the

board of directors, where it recommends the dividend payment and invites the

shareholders for another meeting, (b) the public declaration of the shareholders’

meeting, (c) the day of the dividend announcement, (d) the day of the shareholders’

meeting and, (e) the ex-dividend date. Consequently, it has to be clear that in the

current study it is defined as “day 0” the day that the amount of the distributed

dividend is publicly announced by the general assembly of the firm (Brown &

Warner, 1985; Strong, 1992; Travlos et al., 2001; Dasilas, 2007).

34

Moreover, the determination of the congruent event window length is a subject

that occupied the mind of several researchers. In the current study, the event occurs at

a distinctly identified time, and thus the start of the event period can be determined

easily (Krivin et al., 2003). The attention should be focused on how much time the

market needs to completely incorporate the new information on the stock prices.

Krivin et al., (2003) suggested in their study three possible approaches of an

appropriate event window length: (a) a fixed time period, (b) an ad hoc approach and,

(c) an approach that depends on how quickly does the market fully incorporates the

available information on the security prices.

Gurgul et al. (2003) used in their study a rather short event window, compared

with those in other event studies. In particular, Gurgul et al. (2003) attempted to

examine the impact of corporate dividend announcements on the Austrian security

prices by incorporating an event window which comprised five trading days – two

days before (-2), two days after (+2) and the event day (0). They justified their

statement on Brown and Warner’s (1985) article, where they implied that “the longer

the event window, the lower the reliability of the statistical results”.

An even shorter event window was used by Lonie et al. (1996) in an attempt to

scrutinize the UK market response to dividend announcements and identify any

abnormal share activity. Namely, they used a three-day event window – one day

before and one after the dividend declaration day.

On the other hand, Asquith and Mullins (1983) employed an event window

which consisted of 21 trading days – ten days surrounding the declaration day.

Moreover, Aharony and Swary (1980) applied a similar although non-symmetric

event window comprised of 19 trading days – ten days before (-10) and eight days

after (+8) the event day (0).

Furthermore, the majority of the researchers make use of 41-day event

window – 20 days before and 20 days after the announcement day (Divecha & Morse,

1983; Dasilas, 2007; Dasilas et al., 2008; Asimakopoulos et al., 2008). The above

researchers believe that this event window is the most appropriate, in order for the

stock prices to capture all the available information conveyed by the dividend

announcements.

Finally, it is a common practice for the most recent researchers the use of more

than one event window in their studies. Travlos et al. 2001 employed a symmetrical

event window of 31 days – 15 days before and 15 days after the event day (0). In

35

addition, Balachandran (1998) used multiple event windows, the larger of which did

not exceed 20 days before and 20 days after the announcement day.

The current study adopts an approach similar to Balachandran’s (1998), as it

employs more than one event window, without however, exceeding in length 20 days

before and after the event day. Therefore, the event window of the present thesis is 41

days (-20 days, +20 days) as it is defined day “0” the day of the dividend

announcement.

9.4 Raw Return Measures

In order to estimate the stock price reaction to corporate dividend

announcements, the current event study employs the use of logarithmic returns.

According to Strong (1992), log-returns are usually preferred in the event studies than

the discrete returns, as they can relate correctly returns over long time intervals.

Therefore, the raw returns (Ri,t) of the stock prices are calculated as follows:

Ri,t = ln(Pi,t) - ln(Pi,t-1) ,

where, Pi,t denotes the daily closing price of the stock i on day t and Pi,t-1 is the daily

closing price of the same stock on the previous day (t-1).

9.5 Abnormal Return Measures

Having calculated the actual logarithmic returns of every stock of the sample,

the classical event study methodology “necessitates” the measurement of the

abnormal – excess returns. By saying abnormal return, researchers mean the

percentage difference between the actual share return, which derives from the

occurrence of the particular event – dividend declaration, and the normal return,

which is expected by the investors to be received in the absence of the particular event

(Dasilas, 2007).

Thus, the abnormal return can be estimated using the following equation:

ARi,t = Ri,t – E(Ri,t) ,

where, ARi,t is the abnormal return on stock i on day t and E(Ri,t) is the expected

return on stock i on day t.

36

In order to determine the expected return of each stock E(Ri,t), the market-

adjusted model, introduced by Brown and Warner (1985) in their seminal study, is

used in the current thesis:

E(Ri,t) = Ri,t – Rm,t

where, Rm,t indicates the market portfolio return on day t.

Numerous researchers both on the Greek and on other capital markets have

used the market model as a standard event study technique in their papers (Travlos et

al., 2001; Capstaff et al., 2004; Asimakopoulos et al., 2007; Dasilas, 2007; Dasilas et

al., 2008).

Finally, as it was mentioned above, the current dissertation uses multiple event

windows, in order to estimate the cumulative abnormal returns (CARs) of the stock

prices of the sample. The 15 event windows that have been used are the following:

(-20, +20), (-20, -1), (-20, 0), (+1, +20), (-10, +10), (-10, -1), (-10, 0), (+1, +10),

(-5, +5), (-5, -1), (-5, 0), (+1, +5), (-1, +1), (-1, 0), (0, +1).

10. Empirical Results

In the previous part of the current study, the applied methodology is

presented, as well as the selected sample of firms and the appropriate event window

for the return measures. The current part presents the empirical findings, in an attempt

to support or to reject the above cited null hypothesis.

First of all, three levels of significance have been applied for the statistical

analysis of the selected data, in an attempt to evaluate if the initial hypothesis stands

true. In particular, a significance level of 10% for t-statistics between 1.66 and 1.95, a

significance level of 5% for t-statics between 1.96 and 2.55 and finally a significance

level of 1% for t-statics higher than 2.55, respectively. In order for the reader to better

understand the importance of the empirical findings, the abnormal returns of the firms

negotiating on the FTSE/ATHEX 20 Index and the abnormal returns of firms

negotiating on the FTSE/ATHEX Mid 40 are initially presented separately and

subsequently the overall reaction of the sample is analysed.

Beginning the analysis with the sample of companies negotiating on the

FTSE/ATHEX 20 Index of the Athens Stock Exchange, the abnormal returns on the

37

stock prices were estimated using the market-adjusted model. For the year 2004, the

following table illustrates the abnormal activity of the stock prices for this year.

38

Table 1. Average daily abnormal returns of the firms listed on the

FTSE/ATHEX 20 Index for the whole event window in 2004

Market-Adjusted Model

Days ARs% t-Statistic

-20 -0,621** -2,07

-19 -0,176 -0,39

-18 +0,621 +1,30

-17 +0,680** +2,20

-16 +0,593 +1,55

-15 +0,263 +0,99

-14 -0,414 -1,23

-13 +0,133 +0,37

-12 +0,266 +0,88

-11 -0,403 -1,58

-10 -0,429 -1,53

-9 +0,319 +1,52

-8 +0,658* +1,70

-7 +0,756 +1,65

-6 +0,797** +2,03

-5 +0,218 +0,57

-4 -0,129 -0,48

-3 -0,090 -0,27

-2 +0,073 +0,23

-1 -0,267 -0,63

0 +0,406 +0,80

1 -1,284** -2,41

2 -0,398 -1,40

3 -0,283 -0,91

4 -0,441 -1,23

5 -0,084 -0,29

6 +0,277 +0,92

7 +0,116 +0,31

8 -0,100 -0,46

9 +0,178 +0,68

10 +0,353 +0,92

11 -0,068 -0,22

12 +0,199 +0,69

13 -0,253 -0,79

14 -0,576** -2,14

15 -0,095 -0,39

16 -0,183 -0,56

17 +0,143 +0,46

18 +0,024 +0,07

19 +0,192 +0,69

20 -0,030 -0,11

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

39

More specifically, throughout the days which precede the dividend

announcements (-20, -1) there is an abnormal activity on the stock prices, however

it seems to be statistically insignificant, except for the following days: t=-20, t=-17,

t=-6, where the abnormal returns (-0.621%), (+0.6796) and (+0.7972) respectively are

statistically significant at the 5% level, and on the day t=-8 (0.6577%), which is

statistically significant at the 10% level of significance. Moreover, on the event day

there is a positive, while statistically insignificant abnormal return of (0.406%).

Finally, there is a negative trend on the stock returns until the fifth day after the

announcement t=+5, but only on the first day t=+1 the abnormal return is statistically

significant (-1.284%) at the 5% level.

Similarly, during the event window before the event day (-20, -1), for the year

2005, there is a fluctuation of the stock returns without the existence of statistically

significant abnormal returns, apart from the fifteenth day t=-15 before the

announcement, where the abnormal return (0.696%) is significant at the 5% level. In

alignment with 2004, on the event day there is a positive, though statistical

insignificant abnormal activity. Moreover, there is a negative reaction of the market

following the announcement day, especially on the days t=+1, t=+8, t=+11, where the

abnormal returns (-1.139%), (-0.843%) and (-0.789%) are statistically significant at

the 5% level. The table below demonstrates the abnormal activity of the stock prices

for the whole event window (-20, +20) for the year 2005.

40

Table 2. Average daily abnormal returns of the firms listed on the

FTSE/ATHEX 20 Index for the whole event window in 2005

Market-Adjusted Model

Days ARs% t-Statistic

-20 +0,177 +0,84

-19 -0,152 -0,29

-18 +0,466 +1,14

-17 -0,207 -0,34

-16 -0,436 -1,40

-15 +0,696** +2,12

-14 -0,447 -1,48

-13 -0,800 -0,85

-12 +0,367 +1,19

-11 +0,232 +0,68

-10 -0,297 -0,91

-9 +0,290 +0,68

-8 -0,043 -0,11

-7 -0,288 -1,03

-6 -0,296 -0,94

-5 +0,349 +1,21

-4 +0,144 +0,42

-3 +0,450 +1,77

-2 +0,145 +0,33

-1 +0,255 +0,64

0 +0,311 +0,32

1 -1,139** -2,40

2 -0,324 -0,92

3 -0,420 -0,95

4 -0,273 -0,54

5 +1,221 +0,99

6 -0,064 -0,22

7 -0,027 -0,06

8 -0,843** -2,16

9 -0,123 -0,25

10 +0,199 +0,62

11 -0,789** -2,18

12 +0,294 +0,75

13 +0,243 +0,97

14 +0,585 +1,38

15 +0,431 +1,28

16 -0,016 -0,05

17 +0,300 +1,02

18 +0,325 +0,84

19 -0,051 -0,15

20 -0,204 -0,58

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

41

In contrast to the preceding years, in 2006 the market does not seem to

experience so much significant abnormal activity, as only on a day before t=-5 and on

a day after the event day t=+2 there are significant abnormal returns on the 5%

significance level. On the other hand during the prior-announcement and the post-

announcement period as well as on the event day the stock prices fluctuate at

statistically insignificant levels. The table below shows the abnormal activity of the

stock prices for the whole event window (-20, +20) for the year 2006.

42

Table 3. Average daily abnormal returns of the firms listed on the

FTSE/ATHEX 20 Index for the whole event window in 2006

Market-Adjusted Model

Days ARs% t-Statistic

-20 +0,715 +1,41

-19 -0,397 -0,87

-18 -0,117 -0,44

-17 +0,519 +1,38

-16 +0,274 +0,89

-15 +0,454 +1,29

-14 +0,026 +0,07

-13 +0,623 +1,43

-12 -0,303 -0,75

-11 -0,514 -1,54

-10 +0,150 +0,28

-9 -0,364 -1,30

-8 +0,115 +0,21

-7 +0,433 +0,87

-6 +0,362 +0,78

-5 +0,907** +2,36

-4 -0,048 -0,11

-3 -0,509 -0,91

-2 +0,387 +0,82

-1 -0,265 -0,69

0 +0,185 +0,44

1 +0,294 +0,79

2 -0,977** -2,42

3 -0,221 -0,51

4 -0,199 -0,35

5 -0,492 -1,28

6 -0,390 -1,37

7 -0,722 -1,54

8 +0,578 +1,39

9 -0,031 -0,06

10 -0,039 -0,07

11 +0,061 +0,13

12 -0,352 -0,82

13 +0,281 +0,61

14 +0,054 +0,11

15 -0,775 -1,20

16 +0,497 +0,79

17 -0,843 -1,48

18 +0,418 +1,06

19 +0,023 +0,05

20 +0,045 +0,13

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

43

In 2007, the market presents a quite similar tendency as in 2004 and in 2005.

Namely, the 20 days before the dividend announcements the stock prices presented

abnormal activity, which was however statistically insignificant, except for the second

day before the announcement t=-2. In particular, on this day t=-2 the abnormal stock

return was (+0.6729%), which is statistically significant at the 5% significance level.

Similarly on the event day, the stock prices experience negative and statistically

significant abnormal return at the 10% level. During the post-announcement period,

although the negative slope of the stock returns dominates, only the second day after

the announcement t=+2 there is a strong statistically significant negative abnormal

return (-1.677%) at the 1% level. The following table depicts the abnormal activity of

the stock prices for the whole event window (-20, +20) throughout 2007.

44

Table 4. Average daily abnormal returns of the firms listed on the

FTSE/ATHEX 20 Index for the whole event window in 2007

Market-Adjusted Model

Days ARs% t-Statistic

-20 +0,204 +0,73

-19 -0,255 -0,97

-18 -0,188 -0,66

-17 +0,220 +0,57

-16 -0,469 -1,47

-15 +0,509 +1,43

-14 -0,108 -0,40

-13 -0,800*** -2,62

-12 -0,176 -0,55

-11 +0,365 +1,02

-10 -0,295 -1,05

-9 -0,069 -0,31

-8 -0,160 -0,58

-7 +0,273 +1,11

-6 +0,145 +0,48

-5 +0,240 +0,70

-4 +0,250 +0,92

-3 +0,373 +1,18

-2 +0,673** +2,50

-1 +0,294 +0,97

0 -0,422* -1,66

1 -0,003 -0,01

2 -1,677*** -3,92

3 -0,658* -1,82

4 +0,358 +0,88

5 -0,245 -1,15

6 -0,259 -0,91

7 -0,036 -0,16

8 -0,213 -0,70

9 -0,180 -0,58

10 -0,027 -0,18

11 +0,132 +0,52

12 -0,103 -0,45

13 +0,264 +1,02

14 -0,058 -0,31

15 -0,463 -1,61

16 -0,252 -0,75

17 -0,136 -0,51

18 -1,993 -0,97

19 -0,090 -0,31

20 -0,204 -0,50

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

45

Finally, the fifth and last year included in the current analysis is 2008. As one

can notice on the table 5 below, the positive abnormal returns monopolize throughout

this year both on the prior-announcement and on the post-announcement period.

Nevertheless, the majority of these returns are not statistically significant. The only

exceptions are on the day t=-6, where a very strong statistically significant abnormal

return can be observed (+1.655%) at the 1% significance level, and on the day t=+2

where a negative abnormal return (-1.157%) can be observed, which is statistically

significant at the 5% significance level.

46

Table 5. Average daily abnormal returns of the firms listed on the

FTSE/ATHEX 20 Index for the whole event window in 2008

Market-Adjusted Model

Days ARs% t-Statistic

-20 -0,208 -0,63

-19 +0,070 +0,16

-18 +0,360 +1,33

-17 +0,430 +0,87

-16 -0,576* -1,77

-15 +0,455 +0,98

-14 +0,429 +1,02

-13 -0,073 -0,17

-12 -0,446 -1,02

-11 +0,226 +0,45

-10 -0,785 -1,42

-9 +0,058 +0,16

-8 +0,433 +0,94

-7 +0,324 +0,85

-6 +1,655*** +4,08

-5 -0,627 -0,52

-4 +0,309 +0,48

-3 +0,021 +0,07

-2 -0,040 -0,11

-1 +0,177 +0,32

0 -0,119 -0,19

1 +0,103 +0,17

2 -1,157** -2,04

3 -0,182 -0,40

4 +0,193 +0,54

5 -0,275 -0,50

6 +0,085 +0,28

7 -0,323 -0,70

8 +0,261 +0,39

9 +0,080 +0,24

10 +0,470 +0,98

11 +0,190 +0,48

12 -0,211 -0,48

13 +0,429 +0,89

14 -0,187 -0,50

15 +0,089 +0,19

16 -0,287 -0,77

17 +0,008 +0,01

18 +0,415 +0,84

19 -1,174*** -3,49

20 +0,203 +0,60

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

47

Having discussed explicitly the empirical findings of the companies

negotiating on the FTSE/ATHEX 20 Index, this part of the chapter analyses the

empirical results of the companies included in the rest of the selected sample, namely

the empirical findings of the firms negotiating on the FTSE/ATHEX Mid 40.

Beginning the analysis with 2004, there is a continual alteration of the

abnormal returns’ signs throughout the prior-announcement period (-20, -1).

However, only five abnormal returns seem to be statistically significant at an accepted

level. On the first event-window day (t=-20) the market reacts negatively

experiencing an abnormal return of -0.644%, which is statistically significant at the

5% level of significance. As the announcement day approaches the market gives the

impression to respond positively t=-18 (+0.491%), t=-14 (+0.838%) and t=-3

(+0.424%), with only exception the fifth day before the announcement (t=-5), where

there is a negative market reaction (-0.455%). Both the positive and the negative

abnormal returns are statistically significant at the 10% level of significance. On the

other hand on the event day (t=0) there is an abnormal return on the stock prices of

about (-0.923%), which is statistically significant at the 10% significance level. The

negative reaction of the market continues for at least six days, where very strong

negative abnormal returns can be noticed, t=+1 (-1.316%), t=+6 (-0.696%), which are

statistically significant at a 1% level, and t=+2 (-0.911%), which is statistically

significant at the 5% level. The table 6 below gives a picture of the average daily

abnormal activity analysed above.

48

Table 6. Average daily abnormal returns of the firms listed on the

FTSE/ATHEX Mid 40 Index for the whole event window in 2004

Market-Adjusted Model

Days ARs% t-Statistic

-20 -0,644** -2,30

-19 +0,162 +0,35

-18 +0,491* +1,74

-17 +0,146 +0,43

-16 -0,178 -0,62

-15 +0,079 +0,29

-14 +0,839* +1,78

-13 -0,051 -0,13

-12 -0,517 -1,31

-11 +0,245 +0,58

-10 +0,168 +0,44

-9 -0,097 -0,45

-8 +0,111 +0,28

-7 -0,052 -0,21

-6 +0,001 +0,01

-5 -0,456* -1,70

-4 -0,184 -0,66

-3 +0,424* +1,68

-2 +0,043 +0,15

-1 +0,567 +1,57

0 -0,923* -1,86

1 -1,317*** -4,24

2 -0,911** -2,07

3 -0,432 -1,30

4 -0,161 -0,48

5 -0,056 -0,15

6 -0,697*** -2,60

7 +0,408 +1,24

8 -0,212 -0,52

9 -0,041 -0,10

10 -0,325 -0,97

11 +0,344 +0,95

12 -0,258 -0,75

13 -0,169 -0,51

14 +0,120 +0,36

15 -0,075 -0,26

16 -0,194 -0,53

17 -0,064 -0,27

18 +0,037 +0,12

19 -0,091 -0,30

20 +0,486 +1,08

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

49

There is a similar market reaction throughout 2005 as well, as there are

negative abnormal returns around the event day. Namely, on the days t=-14, t=-5 and

t=-1 the abnormal returns were (-0.540%), (-0.431%) and (-0.604%) correspondingly.

The negative slope continues to exist around the event day with statistically strong

negative abnormal returns. Specifically, on the event day (t=0) the abnormal return is

-1.521%, which is statistically significant at the 1% significance level. Moreover, the

subsequent day (t=+1) the abnormal return appears decreased (-1.046%) and

statistically significant at the 1% significance level. It can be clearly stated that the

dividend announcements conveyed negative news to the market place and this can be

reflected on the stock prices’ behaviour. The next table illustrates the above

mentioned behaviour analytically.

50

Table 7. Average daily abnormal returns of the firms listed on the

FTSE/ATHEX Mid 40 Index for the whole event window in 2005

Market-Adjusted Model

Days ARs% t-Statistic

-20 +0,296 +1,06

-19 +0,363 +0,79

-18 -0,256 -0,91

-17 +0,030 +0,08

-16 +0,411 +1,14

-15 -0,469 -1,24

-14 -0,540** -2,00

-13 +0,170 +0,92

-12 -0,267 -1,25

-11 -0,285 -1,22

-10 -0,299 -1,52

-9 +0,318 +1,28

-8 +0,215 +1,00

-7 +0,204 +0,65

-6 -0,108 -0,52

-5 -0,431* -1,85

-4 +0,085 +0,30

-3 -0,153 -0,60

-2 +0,026 +0,08

-1 -0,604** -2,08

0 -1,521*** -3,04

1 -1,046*** -2,62

2 -1,569 -1,30

3 -0,341 -1,01

4 -0,122 -0,40

5 +0,381 +1,01

6 +0,738** +2,43

7 +0,098 +0,28

8 +0,538 +1,28

9 -0,106 -0,40

10 -0,226 -0,65

11 -0,483 -1,43

12 -0,523 -1,35

13 +0,394 +1,08

14 -0,196 -0,59

15 +0,504 +1,26

16 +0,373 +0,89

17 -0,145 -0,34

18 +0,735** +2,24

19 +0,344 +1,05

20 +0,113 +0,19

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

51

Contradicting with the preceding economic years, in 2006 there is not any

statistically significant abnormal activity during the period before the announcements.

On the event day there is a positive, while insignificant abnormal return. On the other

hand, throughout the post announcement period, the market appears to respond in

general positively to the announcements. Specifically, on the day t=+1 and on the day

t=+7 the abnormal returns equals to +0.634% and +0.674% and they are statistically

significant at the 5% level. However, a negative abnormal return of about -0.636%

intervenes the above ones on the day t=+4, and is statistically significant at the 5%

level of significance. Table 8 below depicts the abnormal returns and their statistical

significance in 2006.

52

Table 8. Average daily abnormal returns of the firms listed on the

FTSE/ATHEX Mid 40 Index for the whole event window in 2006

Market-Adjusted Model

Days ARs% t-Statistic

-20 -0,539 -1,04

-19 +0,036 +0,09

-18 +0,345 +0,99

-17 -0,242 -0,60

-16 -0,103 -0,19

-15 -0,041 -0,15

-14 -0,327 -0,96

-13 -0,667** -2,24

-12 -0,180 -0,27

-11 -0,327 -0,81

-10 +0,858 +1,39

-9 +0,764 +1,20

-8 -0,153 -0,28

-7 -0,109 -0,21

-6 +0,309 +0,61

-5 +0,332 +0,86

-4 +0,159 +0,48

-3 +0,665 +1,23

-2 -0,035 -0,08

-1 +0,273 +0,55

0 +0,305 +0,44

1 +0,634* +1,92

2 -0,340 -0,71

3 +0,386 +1,06

4 -0,636** -2,14

5 +0,267 +0,62

6 +0,059 +0,16

7 +0,674* +1,74

8 -0,268 -0,90

9 +0,171 +0,51

10 +0,001 +0,01

11 +0,177 +0,50

12 +0,077 +0,21

13 +0,159 +0,48

14 -0,034 -0,11

15 -0,032 -0,08

16 +0,417 +1,02

17 +0,027 +0,06

18 +0,023 +0,06

19 +0,256 +0,72

20 -0,466 -1,48

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

53

Additionally, in 2007 during the event window statistically significant

abnormal returns can be observed only on three days before and on two days after the

event day. In particular, on the day t=-18 there is a positive abnormal return of about

+0.923% which is statistically significant at the 5% level. Also, on the next day t=-17

the abnormal return appears increased at +1.687%, which is significant at the 1%

level of significance, and finally on the day t=-2 the abnormal return equals to

+0.897%, which is significant at the 5% level. It can be stated that market participants

expect the dividend announcements to have a positive impact on the stock prices.

However, throughout the post-announcement period the only statistically significant

abnormal returns appear to have a negative sign. Namely, on the days t=+3, t=+19 and

t=+20 the abnormal returns were -0.607%, -0.865% and 1.201%, which are

statistically significant at 10%, 1% and 5% significance level, respectively. The table

below reviews the average abnormal activity of the stock prices for the whole event

window (-20, +20).

54

Table 9. Average daily abnormal returns of the firms listed on the

FTSE/ATHEX Mid 40 Index for the whole event window in 2007

Market-Adjusted Model

Days ARs% t-Statistic

-20 -0,401 -1,38

-19 -0,187 -0,65

-18 +0,925** +2,39

-17 +1,688*** +2,65

-16 -0,089 -0,32

-15 -0,083 -0,27

-14 -5,148 -0,95

-13 +5,652 +1,05

-12 +0,304 +0,83

-11 +0,788** +1,96

-10 +0,506 +1,44

-9 +0,680 +1,55

-8 -0,157 -0,62

-7 +0,246 +0,66

-6 -0,057 -0,24

-5 -0,194 -0,43

-4 +0,313 +0,91

-3 +0,194 +0,58

-2 +0,897** +2,33

-1 +0,079 +0,23

0 -0,181 -0,71

1 +0,673 +1,37

2 +0,076 +0,22

3 -0,607* -1,88

4 -0,128 -0,34

5 -0,361 -1,16

6 +0,548 +1,18

7 -0,253 -0,63

8 +0,427 +1,39

9 +0,012 +0,04

10 +0,036 +0,10

11 -0,225 -0,76

12 -2,544 -1,18

13 +0,278 +0,72

14 -0,308 -1,33

15 -0,007 -0,02

16 +0,365 +1,04

17 -0,064 -0,27

18 -0,240 -1,39

19 -0,865*** -3,62

20 -1,201** -2,16

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

55

Finally in 2008, the period before the event day (-20, -1) appears to have a

quite strong positive abnormal activity for the stock prices, which increases near the

event day. As a whole, five days in the prior-announcement period present positive

statistically significant abnormal activity, t=-18 (+0.732%), which is significant at the

10% level, t=-11 (+0.662%), t=-7 (+0.878%), t=-4 (+0.591%), which are significant at

the 5% level, and finally t=-3 (+0.648%), which is statistically significant at the 1%

significance level. On the other hand, both on the event day and the post-event day

period the majority of the abnormal returns appear to be negative. However, the

negative abnormal returns both on the event day and the post-announcement period

are not statistically significant at any accepted level. The table 10 below illustrates the

average daily abnormal returns for the whole event window (-20, +20) in 2008.

56

Table 10. Average daily abnormal returns of the firms listed on the

FTSE/ATHEX Mid 40 Index for the whole event window in 2008

Market-Adjusted Model

Days ARs% t-Statistic

-20 +0,395 +0,86

-19 +0,174 +0,44

-18 +0,732 +1,77

-17 +0,739 +1,39

-16 -0,492 -1,29

-15 -0,498 -1,55

-14 +0,071 +0,23

-13 +0,280 +0,91

-12 +0,541 +0,93

-11 +0,662 +2,07

-10 +0,006 +0,02

-9 -0,028 -0,08

-8 +0,508 +1,18

-7 +0,878 +2,41

-6 -0,313 -0,93

-5 -0,126 -0,37

-4 +0,591 +2,02

-3 +0,648 +2,91

-2 -0,107 -0,33

-1 +0,355 +1,02

0 -0,114 -0,33

1 +0,242 +0,69

2 -1,053 -1,52

3 -0,106 -0,30

4 -0,238 -0,52

5 -0,270 -0,60

6 -0,548 -1,28

7 -0,346 -1,08

8 +0,806 +1,90

9 +0,394 +0,79

10 -0,621 -0,97

11 -0,115 -0,26

12 -0,304 -0,54

13 +0,152 +0,38

14 +0,021 +0,05

15 +0,364 +0,91

16 -0,315 -0,83

17 -0,147 -0,42

18 -0,164 -0,36

19 +0,138 +0,26

20 +0,092 +0,23

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

57

In order for the reader to have a more aggregate and general view of the

market reaction, the table and the graph below illustrates the average abnormal returns

of the whole sample for all the examined years (2004-2008).

58

Table 11. Average daily abnormal returns of the whole sample of firms for the

event window for the all the examined years (2004-2008).

Market-Adjusted Model

Days ARs% t-Statistic

-20 -0,011 -0,08

-19 -0,045 -0,34

-18 +0,386*** +3,19

-17 +0,553*** +3,08

-16 -0,047 -0,35

-15 +0,026 +0,20

-14 -0,621 -0,96

-13 +0,578 +0,91

-12 +0,051 +0,29

-11 +0,166 +1,36

-10 +0,110 +0,66

-9 +0,236* +1,84

-8 +0,069 +0,56

-7 +0,200 +1,58

-6 +0,206 +1,47

-5 -0,143 -0,91

-4 +0,200 +1,48

-3 +0,160 +1,55

-2 +0,186* +1,67

-1 +0,079 +0,68

0 -0,209 -1,16

1 -0,226 -1,36

2 -0,876*** -3,44

3 -0,286** -2,34

4 -0,214 -1,61

5 -0,177 -0,90

6 -0,063 -0,46

7 -0,004 -0,03

8 +0,187 +1,22

9 +0,034 +0,26

10 -0,002 -0,01

11 -0,034 -0,30

12 -0,464 -1,57

13 +0,157 +1,31

14 -0,019 -0,19

15 +0,000 0,00

16 +0,073 +0,50

17 -0,067 -0,59

18 +0,025 +0,12

19 -0,095 -0,70

20 -0,077 -0,52

Note: * indicates that the abnormal return is statistically significant at the 10% level, **

indicates that the abnormal return is statistically significant at the 5% level and *** indicates

that the abnormal return is statistically significant at the 1% level.

59

As one can observe from table 11 and the above graph, the majority of the

abnormal returns in the prior-announcement period appear to have a positive sign,

although most of them move at statistically insignificant levels. However, on the day

t=-17 the market reacts abnormally, having a return of about +0.553%, which is

statistically significant at the 1% level. Additionally, on the days t=-9 and t=-2 the

abnormal returns are +0.236% and +0.186% correspondingly, which are statistically

significant at the 10% level of significance. As in the majority of the years that have

been examined separately, on the event day there is a negative, while statistically

insignificant abnormal return. At last, throughout the post-announcement period the

market seem to react negatively with strong abnormal returns around the

announcement day. Specifically, on the days t=+2 and t=+3 the abnormal returns -

0.876% and -0.286% respectively, and thus, it can be clearly stated that the market

has a general tendency to react negatively to dividend announcements.

As the reader can observe from the table below, the Cumulative Abnormal

Returns (CARs) follow, in general, a similar trend as the abnormal returns.

Average daily abnormal activity of the whole sample for all the

examined years (2004-2008)

-1,00%

-0,80%

-0,60%

-0,40%

-0,20%

0,00%

0,20%

0,40%

0,60%

0,80%

-20

-18

-16

-14

-12

-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20

60

Table 12. Cumulative Abnormal Returns (CARs) of the whole sample of firms for the multiple selected event windows

Note: * indicates that the abnormal return is statistically significant at the 10% level, ** indicates that the abnormal return is statistically significant at the 5%

level and *** indicates that the abnormal return is statistically significant at the 1% level.

2004 2005 2006 2007 2008 2004-2008

Event

Windows

CAR% t-statistic CAR% t-statistic CAR% t-statistic CAR% t-statistic CAR% t-statistic CAR% t-statistic

(-20,+20) -1.603 -0.76 -1.882 -0.79 +1.606 0.95 -1.131 -0.21 +2.269 0.99 +0.002 0.00

(-20,-1) +1.829 1.24 -0.517 -0.31 +1.617 1.38 +4.083 1.06 +4.163*** 2.61 +2.340* 1.97

(-20,0) +1.463 0.96 -1.289 -0.75 +1.871 1.55 +3.810 0.96 +4.103** 2.51 +2.130* 1.75

(+1,+20) -3.066** -2.07 -0.593 -0.35 -0.265 -0.23 -4.941 -1.28 -1.834 -1.15 -2.128* -1.79

(-10,+10) -2.136 -1.41 -2.634 -1.54 +2.155* 1.79 +1.081 0.27 +0.584 0.36 -0.532 -0.44

(-10,-1) +1.103 1.05 -0.151 -0.13 +2.269*** 2.73 +2.209 0.81 +2.103* 1.87 +1.303 1.55

(-10,0) +0.737 0.67 -0.923 -0.74 +2.524*** 2.89 +1.936 0.68 +2.043* 1.73 +1.094 1.24

(+1, +10) -2.873*** -2.74 -1.711 -1.45 -0.369 -0.44 -0.856 -0.31 -1.459 -1.29 -1.626* -1.94

(-5, +5) -2.934*** -2.67 -2.835** -2.29 +0.775 0.89 +0.161 0.06 -0.842 -0.71 -1.506* -1.71

(-5, -1) +0.147 0.20 -0.087 -0.10 +1.008* 1.71 +1.495 0.78 +0.658 0.83 +0.482 0.81

(-5, 0) -0.219 -0.27 -0.859 -0.94 +1.262* 1.96 +1.222 0.58 +0.598 0.69 +0.272 0.42

(+1, +5) -2.715*** -3.67 -1.976** -2.36 -0.487 -0.83 -1.061 -0.55 -1.440* -1.81 -1.779*** -3.00

(-1, +1) -1.451** -2.53 -2.108*** -3.26 +0.794* 1.74 +0.304 0.20 +0.402 0.65 -0.356 -0.77

(-1, 0) -0.148 -0.32 -1.024* -1.94 +0.302 0.81 -0.112 -0.09 +0.234 0.46 -0.130 -0.35

(0, +1) -1.669*** -3.57 -1.856*** -3.51 +0.747** 2.01 +0.143 0.12 +0.109 0.22 -0.435 -1.16

61

Specifically, it is quite obvious that the market reacts positively during the

period before the dividend announcements, while throughout the first days of the post-

announcement period strong negative abnormal returns are observed. More

particularly, for the whole event window (-20, +20) the CAR seem to be marginally

positive, but statistically insignificant. On the other hand, throughout the event

windows that precede the announcement day, (-20, -1) and (-20, 0), there are positive

and statistically significant cumulative abnormal returns. For example, for all the

examined years simultaneously, the CARs are +2.340% and +2.130% for the above

event windows respectively, which are statistically significant at the 10% level. In

contrast, throughout the post announcement event windows, the sign of the CARs

turns to be negative. Namely, for all the examined years simultaneously it equals to

-2.128% and is statistically significant at the 10% level, as well. This is a result of the

strong negative CAR that can be noticed in 2004 (-3.066%), which is statistically

significant at the 5% significance level. However, the strongest negative abnormal

returns appear to be just few days after the event day and particularly during the

following event windows (+1, +5) and (0, +1). In 2004, an extremely statistically

strong CAR, of about -2.715%, exists and it is significant at the 1% level. Moreover,

in 2004 and 2005 there are statistically significant CARs in the short event window (0,

+1), -1.669% and -1.856% correspondingly, which are statistically significant at the

1% level.

In order to present the above results, the t-test has been applied in the current

thesis. The above discussed outcomes undoubtedly reject the null hypothesis that

supports the irrelevance theory proposed by Miller and Modigliani (1961), as

abnormal returns were sighted both before and after the dividend announcements.

Generally, the trend that has been followed by the abnormal returns is positive in the

prior-announcement period and negative in the post-announcement period.

Specifically for all the examined years simultaneously, in the event window (-20, -1)

the CAR is +2.340% (statistically significant at the 10% level), while in the event

window (+1, +20) the CAR is -2.128% (statistically significant at the 10% level).

Nevertheless, the results would be insufficient without mentioning two

important limitations that have been taken into account throughout the analysis.

Firstly, the composition of the indices was not unchanged during the examined years

(2004-2009). Moreover, the sample consists of firms that did not distribute dividends

62

some of the examined years. The following tables depict those companies, according

to their index, as well as the years that did not pay dividends.

Table 13.

FTSE/ATHEX 20 Index

Firm Year(s)

MARFIN INVESTMENT GROUP SA (CR)

2008

GREEK POSTAL SAVINGS BANK (CR)

2004, 2005, 2006, 2007

MARFIN POPULAR BANK PUBLIC CO

LTD (CR)

2004, 2005, 2006, 2007

Table 14.

FTSE/ATHEX Mid 40

Firm Year(s)

ALAPIS (CR)

2004, 2005, 2006, 2007

ASPIS BANK S.A. (CR)

2004, 2005, 2006

EUROBANK PROPERTIES R.E.I.C. (CR)

2004, 2005

INFO-QUEST S.A. (CR)

2004, 2005, 2006

PROTON BANK S.A. (CR)

2004, 2005

LAMBRAKIS PRESS S.A. (CR)

2004, 2005, 2006

HELLENIC EXCHANGES S.A. HOLDING

(CR)

2004

ATHENS MEDICAL C.S.A. (CR)

2004

FOURLIS S.A.(CR)

2004

LAMDA DEVELOPMENT S.A. (CR)

2005, 2006, 2008

ALFA-BETA VASSILOPOULOS S.A.(CR)

2005

ANEK LINES S.A. (CR)

2006

INTRACOM S.A. HOLDINGS (CR)

2006, 2007, 2008

MINOAN LINES S.A. (CR)

2006

DIAGNOSTIC&THERAPEUTIC CENTER

OF ATHENS YGEIA (CR)

2006, 2008

BABIS VOVOS INTER/NAL TECHNICAL

S.A. (CR)

2007, 2008

63

11. Conclusions

The relationship between the dividend policy and the value of the firm is an

issue that has been arisen many decades ago and stimulated the interest of many

economic researchers. However, it is also a matter of intense debate, as many theories

have been developed in an attempt to shed some light to this troublesome issue. The

aim of the current thesis was to examine the market reaction to dividend

announcements by Greek listed companies on the indices FTSE/ATHEX 20 and

FTSE/ATHEX Mid 40.

As it was mentioned in the second part of the study, the Greek stock market is

characterized by some unique characteristics that other stock markets do not have,

making it an ideal candidate for academic research. The absence of double taxation in

the Greek stock market, in contrast with other stock markets in the USA and Europe,

is a characteristic that may lead to different responses of the market participants to

dividend announcements.

The empirical findings of the current thesis obviously reject the null

hypothesis and challenge the irrelevance theory introduced by Miller and Modigliani

(1961), as they indicate the existence of abnormal activity in the stock market both

before and after the dividend announcements. In particular, they indicate positive

market reaction during the prior-announcement period (statistically significant at the

10% level) and negative market reaction throughout the post-announcement period

(statistically significant at the 10% level). On the other hand, on the event day, which

is the day that the amount of dividends is officially announced by the firms, most of

the abnormal returns that have been observed appear to be statistically insignificant at

any accepted level. Therefore, it can be clearly stated that market participants expect

the dividend announcements to have a positive impact on the stock prices, and they

adapt their own portfolios according to their expectations. However, investors seem to

interpret the news come from the dividend announcements, as ominous for the firms’

future, and thus they react with a negative manner.

As it was mentioned in the last chapter of the literature review, there are

numerous researches concerning the signaling effect on the Greek stock market.

Nevertheless, none of them has the same outcomes with the present study. Initially,

Papaioannou et al. (2000) did not observe any abnormal stock market activity around

the dividend announcements by the firms including in their sample. Moreover,

Asimakopoulos et al. (2007) stated that the signaling effect does not apply for firms

64

that distribute only the minimum required amount as dividends, even for unexpected

changes in their dividend policy. Therefore, the empirical findings of the above two

mentioned studies are undoubtedly aligned with the irrelevance theory and are in clear

contradiction with the results of the present thesis. Finally, Dasilas (2007) implied that

there are no abnormal stock returns during the prior-announcement period, a fact that

is clearly in contrast with the findings of the current dissertation, even if both studies

support the signaling effect of dividends.

Thus, in spite of the restricted number of limitations, the current study through

its empirical findings and based on previous relevant literature is an additional attempt

to shed some light to one of the most troublesome issues of the financial theory.

65

References

1. Abeyratna, G., Lonie, A., Power, D., Sinclair, C., (1996), “The influence of

company financial performance on the interpretation of dividend and earnings

signals: A study of accounting- and market based data”, British Accounting

Review, Vol. 28, pp. 229-247.

2. Aharony, J., Swary, I., (1980), “Quarterly Dividend and Earnings

Announcements and Stockholders' Returns: An Empirical Analysis”, The

Journal of Finance, Vol. 35, No. 1, pp. 1-12.

3. Allen, F., Bernardo, A., Welch, I., (2000), “A Theory of Dividends Based on

Tax Clienteles”, The Journal of Finance, Vol. 55, No. 6, pp. 2499-2536.

4. Anastasiou, T., (2007), “A dividend function for Greek manufacturing”,

Managerial Finance, Vol. 33, No. 5, pp 344-347.

5. Asimakopoulos, P., Lamprinoudakis, C., Tsangarakis, N., Tsiritakis, E.,

(2007), “Signalling with mandatory dividends: the case of the Greek Stock

Market, Working Paper, available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=984445

6. Asquith, P., Mullins, D., (1983), “The Impact of Initiating Dividend Payments

on Shareholders' Wealth”, The Journal of Business, Vol. 56, No. 1, pp. 77-96.

7. Balachandran, B., (1998), “Dividend Reductions and Interim Effect: UK

Evidence”, Working Paper Series, available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=114990

8. Barako, D., Tower, G., (2007), “Corporate Governance and Bank

Performance: Does ownership matter? Evidence from the Kenyan Baking

Sector”, Corporate Ownership & Control, Vol. 4, pp 133-144.

9. Bernheim, D., (1991), “Tax policy and the dividend puzzle”, The RAND

Journal of Economics, Vol. 22, No. 4, pp. 455-476.

10. Bhattacharya, S., (1979), “Imperfect Information, Dividend Policy, and "The

Bird in the Hand" Fallacy”, The Bell Journal of Economics, Vol. 10, No. 1, pp.

259-270.

11. Black, F., Scholes, M., (1974), “The effects of dividend yield and dividend

policy on common stock prices and returns”, Journal of Financial Economics,

Vol. 1, pp. 1-22.

12. Bodie, Z., Kane, A., Marcus, A., (2009), Investments, McGraw-Hill –

International Edition, New York.

66

13. Brennan, M., Thakor, A., (1990), “Shareholder Preferences and Dividend

Policy”, The Journal of Finance, Vol. 45, No. 4, pp. 993-1018.

14. Brealey, R., Myers S., Allen, F., (2006), Corporate Finance, New York:

McGraw Hill International Edition.

15. Brown, S., Warner, J., (1985), “Using daily stock return: The case of event

studies”, Journal of Financial Economics, Vol. 14, pp 3-32.

16. Capstaff, J., Klæboe, A., Marshall, A., (2004), “Share Price Reaction to

Dividend Announcements: Empirical Evidence on the Signaling Model from

the Oslo Stock Exchange”, Multinational Finance Journal, Vol. 8, No. 1, pp.

115–139.

17. Christie, W., (1994), “Are Dividend Omissions Truly the Cruelest Cut of

All?”, The Journal of Financial and Quantitative Analysis, Vol. 29, No. 3, pp.

459 -480.

18. Conroy, R., Eades, K., Harris, R., (2000), “A Test of the Relative Pricing

Effects of Dividends and Earnings: Evidence from Simultaneous

Announcements in Japan”, The Journal of Finance, Vol. 55, No. 3, pp. 1199-

1227.

19. Dasilas, A., (2007), “Stock market reaction to dividend announcements:

Evidence from the Greek Stock Market”, Working Paper, available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=981885&rec=1&srcabs=9

55768

20. Dasilas, A., Lyroudi, K., Ginoglou, D., (2008), “Joint effects of interim

dividends and earnings announcements in Greece”, Studies in Economics and

Finance, Vol. 25, pp 212-232. (only electronically available at

http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=82459

A87431077AE8C8DC616EC47B9E0?contentType=Article&contentId=17480

79 )

21. DeAngelo, H., DeAngelo, L., Skinner, D., (2000), “Special dividends and the

evolution of dividend signaling”, Journal of Financial Economic, Vol. 57, pp.

309-354.

22. DeAngelo, H., DeAngelo, L., (2004), “The Irrelevance of the MM Dividend

Irrelevance Theorem”, Working Paper, available at

http://papers.ssrn.com/sol3/paper's.cfm?abstract_id=680855

67

23. Divecha, A., Morse, D., (1983), “Market Responses to Dividend Increases and

Changes in Payout Ratios”, The Journal of Financial and Quantitative

Analysis, Vol. 18, No. 2, pp. 163 -173.

24. Eades, K., Hess, P., Han KIM, E., (1985), “Market Rationality and Dividend

Announcements”, Journal of Financial Economics, Vol. 14, pp. 581-604.

25. Elton, E., Gruber, M., (1970), “Marginal Stockholder Tax Rates and the

Clientele Effect”, The Review of Economics and Statistics, Vol. 52, No. 1, pp.

68-74.

26. Fama, E., (1965), “The Behavior of Stock-Market Prices”, The Journal of

Business, Vol. 38, No. 1, pp. 34-105.

27. Gordon, M., J., (1959), “Dividends, Earnings, and Stock Prices”, The Review

of Economics and Statistics, Vol. 41, No. 2, pp. 99-105.

28. Gordon, M., J., (1962), “The Savings Investment and Valuation of a

Corporation”, The Review of Economics and Statistics, Vol. 44, No. 1, pp. 37-

51.

29. Graham, B., Dodd, D., (1951), “Security Analysis”, McGraw-Hill, New York.

30. Gurgul, H., Majdosz, P., Mestel, R., (2003), “GARCH Modelling of Austrian

Stock Market Reactions on Dividend Announcement”, available at

http://www.dem.umk.pl/2003/080_gurgul.pdf

31. Harkavy, O., (1953), “The Relation between Retained Earnings and Common

Stock Prices for Large, Listed Corporations”, The Journal of Finance, Vol. 8,

No. 3, pp. 283-297.

32. Jensen, M., (1986), “Agency Costs of Free Cash Flow, Corporate Finance, and

Take-overs”, American Economics Review, Vol. 76, No. 2, pp 323-329.

33. Kato, K., Loewenstein, U., (1995), “The Ex-Dividend-Day Behavior of Stock

Prices: The Case of Japan”, The Review of Financial Studies, Vol. 8, No. 3,

pp. 817-847.

34. Kato, K., Loewenstein, U., Tsay, W., (1997), “Voluntary dividend

announcements in Japan”, Pacific-Basin Finance Journal, Vol. 5, pp. 167-193.

35. Kato, K., Loewenstein, U., Tsay, W., (2002), “Dividend policy, cash flow, and

investment in Japan”, Pacific-Basin Finance Journal, Vol. 10, pp. 443– 473.

36. Krivin, D., Patton, R., Rose, E., Tabak, D., (2003), “Determination of the

Appropriate Event Window Length in Individual Stock Event Studies”,

68

Working Paper Series, available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=466161

37. Lintner, J., (1956), “Distribution of Incomes of Corporations among

Dividends, Retained Earnings, and Taxes”, The American Economic Review,

Vol. 46, No. 2, pp. 97-113.

38. Lintner, J., (1962), “Dividends, Earnings, Leverage, Stock Prices and the

Supply of Capital to Corporations”, The Review of Economics and Statistics,

Vol. 44, No. 3, pp. 243-269.

39. Litzenberger, R., Ramaswamy, K., (1980), “Dividends, Short Selling

Restrictions, Tax-Induced Investors Clienteles and Market Equilibrium”, The

Journal of Finance, Vol. 35, No. 2, pp. 469-482.

40. Litzenberger, R., Ramaswamy, K., (1982), “The Effects of Dividends on

Common Stock Prices Tax Effects or Information Effects?”, The Journal of

Finance, Vol. 37, No. 2, pp. 429-443.

41. Lonie, A., Abeyratna, G., Power, D., Sinclair, C., (1996), “The Stock Market

Reaction to Dividend Announcements: A UK study of complex market

signals” Journal of Economic Studies, Vol. 23, No. 1, pp. 32-52.

42. MacKinlay, G., (1997), “Event Studies in Economics and Finance”, Journal of

Economic Literature, Vol. 35, pp. 13-39.

43. Masulis, R., Trueman, B., (1988), “Corporate investment and dividend

decisions under differential personal taxation”, Journal of Financial and

Quantitative Analysis, Vol. 23, No. 4, pp. 369–385.

44. Miller, M., (1986), “Behavioral Rationality in Finance: The Case of

Dividends”, The Journal of Business, Vol. 59, No. 4, pp. S451-S468.

45. Miller, M., Modigliani, F., (1958), “The Cost of Capital, Corporation Finance

and the Theory of Investment”, The American Economic Review, Vol. 48, No.

3, pp. 261-297.

46. Miller, M., Modigliani, F., (1961), “Dividend policy, growth, and the

valuation of shares”, Journal of Business, Vol. 34, pp 411-433.

47. Miller, M., Scholes, M., (1982), “Dividends and Taxes: Some Empirical

Evidence”, The Journal of Political Economy, Vol. 90, No. 6, pp. 1118-1141.

48. Papaioannou, G., Travlos, N., Tsangarakis, N., (2000), “Valuation Effects of

Greek Stock Dividend Distribution”, European Financial Management, Vol.

6, No. 4, pp. 515-531.

69

49. Petit, R., (1972), “Dividend announcements, security performance and capital

market efficiency”, Journal of Finance, Vol. 27, No. 5, pp 993-1007.

50. Petit, R., (1976), “The Impact of Dividend and Earnings Announcements:

Reconciliation”, The Journal of Business, Vol. 49, No. 1, pp 86-96.

51. Strong, N., (1992), “Modelling Abnormal Returns: A Review Article”,

Journal of Business Finance & Accounting, Vol. 19, No. 4, pp. 533-553.

52. Travlos, N., Trigeorgis, L., Vafeas, N., (2001), “Shareholder Wealth Effects of

Dividend Policy Changes in an Emerging Stock Market: The Case of Cyprus”,

Multinational Finance Journal, Vol. 5, No.2, pp. 87–112.

53. Walter, J., (1956), “Dividend Policies and Common Stock Prices”, The

Journal of Finance, Vol. 11, No. 1, pp. 29-41.

54. Watts, R., (1973), “The Information Content of Dividends”, The Journal of

Business, Vol. 46, No. 2, pp. 191-211.

70

71