Price Formation around Dividend Announcement Date: Empirical Evidence in Indonesian Stock Exchange

Budi Frensidy, Irene Josephine, Ignatius Roni Setyawan
European Research Studies Journal, Volume XXII, Issue 3, 106-118, 2019
DOI: 10.35808/ersj/1460


Purpose: This research aims to prove that there is a change in abnormal return around the dividend announcement date. Based on differences in the interests of rational and irrational investors related to the dividend announcement and subsequent event, the authors propose two research questions: first, whether there is an abnormal return around the dividend announcement date; second, whether price changes around that event. Design/Methodology/Approach: The time span of the study was five days before and five days after the announcement date of 15 companies which announced dividends from 2007-2012. To answer the first question, we used the t-test and to answer the second question, we employ the coefficient of multiple regression equations, namely the bid and ask price. Findings: The results of this study indicate significant abnormal returns around the dividend announcement date. The price formation is not influenced by dividend announcement, but it was influenced by the demand and the bid prices which implies that there is an effort of investors to maximize capital gains by selling and buying certain stocks. Practical Implications: Dividend announcement date still contains information for investors, because the possibility of surprise factor has been reduced. Investors have already received the rumors about the dividend announcement date and the event has received financial reports, which may have been used by investors in predicting the stock price. Originality/Value: Our study is the first to link bid and ask price to the price formation process before and after the dividend announcement date. The results of this test have answered the question that there are price changes during the dividend distribution event for testing individual levels of the company.

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