Dividend announcement effects on stock returns: A test of the signaling hypothesis in the Indonesian stock market



Date of Publication


Document Type


Degree Name

Doctor of Business Administration

Subject Categories

Business Administration, Management, and Operations


Ramon V. Del Rosario College of Business


Management and Organization Department

Thesis Adviser

Rhoderick R. Santos

Defense Panel Chair

Mario V. Perilla

Defense Panel Member

Louie A. Divinagracia
Benito L. Teehankee
Victor B. Mariano


The signaling hyphotesis asserts that managers use divided announcements to signal changes in their expectations about the future prospects of the firm. If dividends convey useful information of an efficient markets this will be reflected in stock changes immediately following a public announcements. This study examines how the Indonesian market responds to the divided announcement and tests whether dividends can convey useful information about future earnings.

Using a sample of 340 cash dividend and 48 stock dividend announcements over the period 1991-1998, the results of the study tend to support the proposition that market participants make considerable use of the information implicit in dividend announcements. The market reacts positively to these announcements when cash dividends are increased. Whereas, the market responds negatively when dividend is reduced or when a stock dividend distribution takes place.

There are three determinants of the market reaction to dividend announcements. For dividend increase, it is shown that announcements for small firm are more informative. For dividend decrease, these is a differential response according to the nature of the economic activity. Before the crisis, a large dividend reduction was accompanied by a more negative response. Concerning stock dividend, the market gives less negative response for firms which have a good cash history.

The study finds little evidence to support the view that changes in cash dividends and stock dividends provide incremental information on a firm’s future earnings performance. On the other hand, the study notes significant earnings changes in the year prior to dividend announcements, suggesting that Indonesian firms in making decision regarding dividend payment rely on prior earning realization.

Abstract Format






Accession Number


Shelf Location

Archives, The Learning Commons, 12F Henry Sy Sr. Hall

Physical Description

181 leaves ; 28 cm


Stock exchanges--Indonesia; Dividends--Indonesia

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