Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol 3, No 2, 2012 12 Cash Dividend Announcement Effect: Evidence from Dhaka Stock Exchange Md. Shehub Bin Hasan 1* Sabrina Akhter 2 Hussain Ahmed Enamul Huda 2 1. School of Business, Ahsanullah University of Science & Technology, 141-142 Love Road, Tejgaon Industrial Area, Tejgaon, Dhaka-1208, Bangladesh 2. Faculty of Business & Economics, Daffodil International University, 4/2, Sobhanbagh, Prince Plaza, Mirpur Road, Dhaka-1207, Bangladesh * E-mail of the corresponding author: shehub_mir@yahoo.com Abstract The sole motive of the paper is to investigate cash dividend announcement effect of the stocks traded in the Dhaka Stock Exchange from 2006 to 2010. Classic event study methodology was used to analyze the data. It was found that in 2006, 2007 and 2009 market has reacted over the announcement in the event date. Some sectors like Food & Auxiliary, Fuel and Miscellaneous have impacted the market both in the event and post event date across the years considered. All the efforts were given to discover reaction therefore the underlying reasoning of such impact are set aside. Keywords: Cash dividend, Dhaka stock exchange, Event study, Announcement effect 1. Introduction Securities, to be more specific stocks are not traded in a vacuum, rather amidst the complex interaction of many variables – some explainable and some not manageable. Thousands, perhaps even more variables can exert influence over stock price and dividend isthe prime variable. Irrespective of the stock market location – New York, Tokyo, Mumbai or Dhaka, stock price volatility at the dividend announcement date and post announcement dates is a common phenomenon, even though the extent of volatility does differ across globe. This study explores the price behavior and evidence of abnormal return at cash dividend announcement date and post announcement date of various stocks traded in Dhaka Stock Exchange (DSE). This study only considers cash dividend paying firms during 2006 to 2010. Normally, two generic effects can be associated with cash dividend declaration – a wealth transfer effect and a signaling effect (Woolridge; 1983). In the absence of a perfect me-first principle, a financing decision like cash dividend payoff will certainly result in wealth transfer among various clusters of security holders. Long ago, Modigliani and Miller (1958, 1961) had postulated that given information symmetry, perfect capital market and production-investment decision preset, the value of a firm reflected in stock price is totally independent of any sort of financing decision like cash dividend payoff. Fama and Miller (1972) had added that in the presence of a perfect me-first rule, any type of financing decision like cash dividend payoff could not have any influence over stock price as well as stockholder’s and bondholder’s wealth. But reality is totally different from Modigliani’s, Fama’s and Miller’s illusionary Atlantis and in reality protective covenants are often incomplete and limited, resulting in wealth transfers in case of cash dividend payment. In a world of information asymmetry, managers convey their messages and expectations to the market by using financial signaling. Bhattacharya (1979), Kalay (1980) had developed cash dividend signaling model assuming that there existed information asymmetry between security holders and managers. As per each of the above mentioned dividend signaling model, stock prices move to a new equilibrium level in responses to the information that the managers tries to convey in dividend decision. Generally with positive unexpected dividend change, there will be positive signaling and wealth transfer effect from common stockholder’s perspective (Woolridge; 1983). On the other hand, with negative unexpected dividend change, there will be negative signaling and wealth transfer effect from common stockholder’s perspective (Woolridge; 1983). The impact of cash dividend announcement on stock price has certainly grabbed