Liquidity reactions towards dividend announcements and information efficiency on the GSE

Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-12, 2016
ISSN: 2454-1362, http://www.onlinejournal.in
Imperial Journal of Interdisciplinary Research (IJIR) Page 1250
Liquidity Reactions towards Dividend
Announcements and Information Efficiency
on the Ghana Stock Exchange.
Evans Tee
Regentropfen College of Applied Science (ReCAS), Kansoe, Bolgatanga, Ghana
Abstract: This study attempts to examine liquidity
(stock returns) reaction to subsequent dividend
announcements and information efficiency in the
Ghanaian Market with a sample of 11 major
companies from those listed on the Ghana Stock
Exchange (GSE). While employing event studies to
measure the event impact, one may find the
techniques to outperform the market. This study
employs event study methodology. More specifically,
it employs the market model in generating abnormal
returns surrounding subsequent dividend
announcements. The liquidity levels of the studied
stocks are very low. Findings show that there is a
little informational content of dividend
announcements on the Ghana Stock Exchange. The
Ghanaian investors hardly consider dividend
announcements as favorable news. The stock returns
cannot however be conclusively be said to react
positively to subsequent dividend announcements in
GSE.
1. Introduction
An investment is the current commitment of
dollars for a period of time in order to derive future
payments that will compensate investors for (1) the
time the funds are committed, (2) the expected rate
of inflation during this time period and (3) the
uncertainty of the future payments (Reilly and
Brown, 2011). Investors globally have purchased one
financial asset or the order with the expectation of
receiving positive returns in the future. The search
for positive returns on investments is made on two
main markets; the capital market and the money
market, and the selection of stocks on these markets
is made on the basis of information. Returns on the
capital market are received in two ways, through
dividends and capital appreciation. Companies
generally declare a share of their profits to their
shareholders as returns on their equity investments.
However for mostly listed companies on the Ghana
Stock Exchange, investors can also look forward to
capital appreciation in addition to their dividend.
Capital appreciation basically is an increase in the
business wealth of a firm and is usually associated
with an increase in the market price of the asset
(Sunderland and Canwell 2004). Positive firm
announcements are reflected especially rapidly in
stock prices, mostly anticipated at the time of
publication. Negative information can cause stronger
price fluctuations by increasing insecurity about
prospects for the future (Schuster 2006). Information
likely to affect the pricing of a company includes the
economy of the country in which it is based, the
industry the company is operating and the earnings
and dividends announced by the company. An
appreciation of the effect of the information flow on
the price leads to the theories surrounding market
efficiency. How effective is a market? Would
information generated about a company be
immediately reflected in its pricing? Is the market a
weak market, semi strong market or strong market?
The Ghana stock exchange is the only stock
market in Ghana and was established in 1990. It has
created the opportunity for investors to meet and
trade on their financial assets such as shares and
bonds. With 35 companies listed on its official list as
at 31st December, 2014 (GSE Official List 2014),
various listing requirements are provided by these
companies including quarterly earnings report and
disclosures (GSE Listing Rule Book, 2009), this
information is readily accessible using sources such
as the Ghana Stock Exchange Official List and press
releases by the companies. Dividend payments, stock
issues and earnings announcement are such
information that is available. Liquidity on a market
has been a focus and subject of debate in financial
literature for many years. Academicians and
researchers have developed many theoretical models
and published many articles to explain or provide
information about the various aspects of liquidity. In
addition to the concept of liquidity is dividend
payment by companies on the stock market.
Researchers have over the years also postulated
the reasons or the motivations for companies and the
dividends that they pay. Modigliani and Miller’s
work in 1961 led the way to various theories about
the relevancies of dividends. Other studies that have
been done show that ‘considerable evidence exists to
support the hypothesis that the payment of dividends
provides information that helps investors and

Vol-2, Issue-12, 2016
analysts value a firm’ (Sant and Cowan, 1994). Other
works done in the field of finance relating to
dividends and especially in emerging markets such
as Ghana have tended to investigate and understand
dividends and its impact on a market. In his work on
“the Information content of Dividend: Evidence from
Nigeria”, Adaramola (2009) concludes in his
findings that dividends have significant information
content about stock prices in Nigeria. Other studies
have gone further in determining the kind of
response to the information content of the dividend.
Studies done in Pakistan have reported a positive
response from market with an increase in liquidity
and price appreciation while others have had
negative response. Bashir, Shah and Hussain (2013)
investigated the information content of dividend
announcement on stock returns in Pakistan and
revealed a mixed result of positive and negative
effect.
A lot of researches done in the past in some
emerging markets as detailed above agree that the
information content contained in dividend must have
a significant impact on the prices of stocks as well as
liquidity due to its signaling intent. The
announcement of dividend must result in an impact
on the price and liquidity especially when the
dividend announced is above or below expectation.
In reality however, there have been situations where
dividends have been announced where reflection of
the information have been partial at best and
investors are left to make the decision whether to
hold the stock and benefit from the gains that is
possible or to sell and exit while in order situations
there have been no impact.
Various studies done have reflected on the lack of
efficiency on the Ghana Stock Exchange. Frimpong
(2008) in his work concluded that the stock market in
Ghana was weakly inefficient. Others who concluded
same include Osei (2002) who in his work was of the
opinion that the Ghana Stock Market was not
efficient. Other work done in Ghana on the subject of
response to market information by investors included
work done by Asamoah (2010) to assess the behavior
of stock prices to dividend announcement, however
his investigation was conducted on the three stocks
that performed badly in the period and not
exhaustive. However research on the stock market to
encompass all dividend paying stocks and their
behavior following dividend announcement using
recent data is an area that can be explored further to
further understand investor behavior on the Ghana
Stock Exchange.
2. Literature Review
Theoretical Review
The objective of the theoretical review is to
examine and review the various perspectives and
theories related to the concept of Dividend. There are
a vast array of materials and arguments about
dividends of which all cannot be presented. However
a few theories would be presented such as the “bird
in hand” argument, dividend irrelevance hypothesis,
tax preference argument, signaling effects and
clientele effects.
The “Bird in hand” argument
The basic assumption here is that a high dividend
payment results in an increase in the value of the
firm. This argument suggests that investors will
prefer to receive dividends now that to wait for some
future gain in the future. This is because payment of
dividends by companies now is a more certain
venture that would result in a reduction of the cost of
capital and hence the share value of the company.
There has been criticism of this theory with M&M
(1961) arguing that consideration to be given as to
the value of a share should be the operational risk of
the company and not how a dividend is shared (Al-
Malkawi et al., 2010).
Dividend Irrelevance Hypothesis
This hypothesis postulated in 1961 by Modigliani
and Miller was of the opinion that investors are not
concerned about a company’s dividend policy as it
relates to the value of a share. They postulated that
the value of a firm was rather dependent on the
earnings of the company which was a function of the
investment policies. These hypothesis are however
based on assumptions that do not exist in real life,
such as the existence of a perfect market that the firm
would operate in, the absence of taxes and the non-
existence of risk (Al-Malkawi et al., 2010).
The Signaling Effect
Signaling effect is the idea that investors are able
to infer information about a company’s future plans
based on signals received as a result of dividends
announcements. An increase in dividend payment
might signal that managers of firms are bullish about
their company’s future prospects. A constant
dividend payment or even a reduction may present
signals that suggest that managers are not optimistic
about the future potential of the company. As a result
of asymmetric information which means managers of
firms know more about the company than
shareholders, shareholders look to actions by
managers to pick up on any signal that might suggest
the future direction of the company. A positive
dividend would lead to investors seeking more of the
shares with an increase in price the result, while a
negative dividend signal would result in the

Vol-2, Issue-12, 2016
offloading of the shares with the price falling.
Dividend signaling is a key concept used by
proponents of inefficient markets (Al-Malkawi et al.,
2010).
Clientele effect
The basic argument in the clientele effect is that
investors are attracted to a certain type of stock as a
result of the policies of the company. Policies such as
Dividend and tax may ensure that a certain group of
investors who are okay with the policies are attracted
the stock. Hence, a change in the policy by the
company may result in some old clientele departing
and some new ones coming in. This may result in
price appreciation or reduction depending on the net
effect of the clientele (Al-Malkawi et al., 2010).
Dividend Concept
In their book, Dividend Policy: Theory and
Practise, Frankfurter, Wood and Wansley (2009)
defined dividend as a “distribution of earnings, past
or present, in real assets among the shareholders of
the firm in proportion to their ownership”. They went
on to further explain the three areas of the definition
above which was that dividends must be distributed
from earnings, must be in the form of real assets
which is not necessarily cash even though it is more
convenient and easily divisible. Their third area of
the definition was that dividend must be shared
according to their holdings in the corporation.
Dividends are usually paid after tax has been
deducted, which means that in some countries
shareholders are tax doubled as a result of their
dividend been classified as income to them. Even
though this results in a liability to the shareholder,
dividend payments are still very welcome by the
shareholders while non-payments or even cuts are
considered bad news and indicative of some bad
times ahead. Baker (2009), wrote of the term
“Dividend Puzzle” as coined by Black in 1976, to
explain the potential relevance of dividends
involving taxes, agency costs and asymmetric
information and their paradoxes.
Dividend Announcement
Shim and Siegel (2008) pointed to a number of
dividend dates that are very important to understand.
Declaration date is the date on which the Board of
Directors declare the dividend. Following this
declaration and date, the payment of dividend
becomes a legal liability to the corporation. The date
of record is the date on which the stock holder is
entitled to receive the dividend. Ex-Dividend date is
the date on which the right to the dividend leaves the
shares. Usually the market price of the stock takes
into account the fact that the stock has gone ex-
dividend and decreases by approximately the amount
of dividend. Date of payment is the date on which
the company distributes the dividend cheques to its
shareholders.
Dividend announcement and Price movements.
Share prices are driven theoretically by the same
economic factors of demand and supply. If demand
for a stock is higher than the supply, the price will
move up. Alternatively, when large funds withdraw
from the market and start selling heavily, prices
come down sharply. The demand for any share price
on its part is driven by fundamentals including
current performance and expected performance. If
there are any policies likely to affect the performance
of the company in the near future, then price
movement is affected by that news (Sabnavis 2008).
Schuster (2006), quoted Ball and Brown 1968 in
their look at market reactions to the accounting
numbers in the Wall Street Journal, that “the major
part of new information is anticipated in stock prices
in the preceding months. He also quoted Dimson and
Mussavian (2000) that the market “appears to
anticipate the information, and most of the price
adjustment is complete before the event is revealed
to the market. When news is released, the remaining
price adjustment takes place rapidly and accurately”.
In their paper, Patell and Wolfson (1983) concluded
that the initial price reaction is evident in the first
pair of price changes following the release of
earnings or dividend announcement and that
dividend announcement induce much less activity
than do earnings although the response to dividend
changes is comparable to the earnings announcement
effect
Market response to dividend announcement
Researches into the market response to dividend
announcement have been done into various stock
markets and the response has been varied. Some
have viewed the announcement as containing signals
that informs investors about the future probability of
their investments in a firm (Osei, 2002). This has led
many researchers to examine the information content
of dividends and to find out the effect of such an
announcement. Results from Patell and Wolfson
(1983) showed that dividend and earnings
announcement resulted in some activity even though
dividend announcement results in less activity than
earnings announcement do. Bayezid and Tanbir
(2010) also provide evidence that the effect of
dividend announcement is much stronger than for
earnings announcements. Bashir, Ali and Hussain
(2013) studies however revealed that stock price
reaction to dividend announcement are not
statistically significant and that dividend
announcement does not convey any information due
to strong contribution of insider trading as well as
other influencing factors in the capital market.

Vol-2, Issue-12, 2016
3. Methodology
Research Design
To conduct this research, event study
methodology was used to determine the effect of
dividend announcement on share prices. The event
study methodology was introduced by Fama, Fisher,
Jensen and Roll (1969) and many researchers have
chosen to use this methodology especially when
examining security price behavior around events
such as earnings announcement and others.
Researchers to have successfully used this method to
determine share price movement to new information
include Aga and Kocamann (2008), Dey and
Radhakrishna (2008), Cox and Weirich (2002). The
event study have been used for two main reasons; (1)
to test the null hypothesis that the market efficiently
incorporates information and (2) examine the impact
of some event on the wealth of the firm’s security
holders. Binder also discussed the event study
methodology in his paper “The event study
methodology since 1969” which provided a
framework for conducting event studies. The
methodology used was deductive and a mixture of
both qualitative and quantitative analysis.
Sources of Data
The main data used in this research are the
announced dividends and daily share price data. The
dividends and share price data are sourced from the
official list of the Ghana Stock Exchange and
company press releases issued from the Ghana Stock
Exchange. The dividend announcement date which is
the date the board announces the dividend was
sourced from official press releases by the Ghana
Stock Exchange. The market capitalization which
referenced the size of the listed companies was also
sourced from the official list of the Ghana Stock
Exchange. The GSE Composite index was also
sourced from the official list. The period of the
research that is used for this period is a five year
period from January 1st 2014 to December 31st
2014. This fall within the period right from the full
automation of the Ghana Stock Exchange to the last
full year of dividend announcements by the
companies. This period is considered sufficient as a
sample for the research. Some data are also sourced
from the annual report of the companies and the
websites of these companies. In order for a company
to be included in the research it must have issued
dividends in the period of the research consistently
and have sufficient data. Those with insufficient data
were not included in the research.
The considerations for a company to be included
in a sample included (i) the shares should be listed
and be actively trading as at January 1st, 2014 and
over the sample period to 31st December, 2014; (ii)
there should have been dividend announcement for
the firms selected and (iii) the firms selected must
have share price data over the sample period.
Data Analysis
The study seeks to understand the effect of
dividend announcement on the liquidity of the Ghana
Stock Exchange as measured by the stock price
reaction of the firms listed and the analysis was
inspired by Binder’s event study methodology and its
adoption by Kakiya et al (2013). This analysis was
also adopted by James M. Njuru in his paper “Test
for under reaction to stock dividend Announcements
at NSE”. The average stock price returns of the
stocks before the dividend announcement up the day
of announcement would be determined and the
average stock return after dividend would be
determined to determine any abnormal level of return
that can be attributed to the dividend announcement.
Using capital market data, an event study
measures the impact of a specific event on the
market. The usefulness of such a study comes from
the fact that given rationality in the market place, the
effect of an event will be reflected immediately in
security prices. Thus a measure of the event’s impact
can constructed using security prices observed over a
relatively short period. In this study, the problem of
calculating and analyzing abnormal return is
considered. The abnormal return is calculated using
actual return of a stock less the market return on the
same day. This facilitates the use of abnormal returns
around the event day in the analysis. The fashion of
abnormal return for both positive growth and
negative growth firms are similar trend. The
abnormal return occurs in the pre as well as in post-
announcement period. That is, stock price reaction to
the firm’s dividend is not instantaneous, which
contradicts the efficient market hypothesis.
The study used dividend announcement dates for
the whole sample period, daily closing stock prices
for the period [-15, to +15] around each dividend
announcement day of every stock, prices of the GSE
CI in the [-15, to +15] time window for each
dividend announcement day of every stock and
number of shares traded each day for each company
in the sample period. The selection of sample has
primarily been guided by two factors, availability of
dividend announcement for the sample period, and
the time to time revision and replacement of stock in
GSE. Using capital market data, an event study
measures the impact of a specific event on the
market.

Vol-2, Issue-12, 2016
4. Presentation of Results
Effect of Dividend Announcement
The present study covers a period of one calendar
year from January 2014 to December 2014 and the
results are based on a sample of firms, listed on the
Ghana Stock Exchange. The data set contains daily
data from the different sectors of 11 dividend paying
stocks over the 31 window period i.e. -15 day to +15
day relative to the dividend announcement, which is
listed on the Ghana Stock Exchange for the period.
Three basic time series data have been employed in
this study. These are, dividend announcement dates
for the whole sample period, daily closing stock
prices for the period [-15, to +15] around each
dividend announcement day of every stock, returns
of the GSE CI in the [-15, to +15] time window for
each dividend announcement day of every stock.
Source: GSE
Almost GCE return does not differ from the market
return. The return behavior of this company prior to
the event day and after the event day is consistent
with the market index. The price path on the event
day also followed with the market movement. The
dividend announcement of the company doesn’t
seem to have any influence in the price. By this is
news, one can earn little amount of return but it
doesn’t fulfill the transaction cost. Liquidity
therefore did not change both in pre- and post-
announcement. This means that, liquidity remained
unchanged after the dividend payment
announcement.
Source: GSE
GOIL returns moved differently from the market
returns in the post announcement days but at the
same time it involved with heavy loss than that of the
market index some few days prior to the
announcement day. The returns of GOIL therefore
remained unchanged after the announcement day.
This implied that the liquidity of the stock was not
affected by the dividend announcement.
Source: GSE
BOPP returns moved differently from the market
returns in the post announcement days but at the
same time it involved with heavy loss than that of the
market index. There is no negative abnormal return
found pre as well as post announcement period. The
above chart proves the BOPP returns movement is
parallel with the market movement. The returns of
the stock reduced after the dividend announcement
was made. Therefore, the announcement of dividend
payment by BOPP reduced the liquidity of the stock.
Source: GSE
The movement of CAL stock returns was differently
from the market returns throughout, and also at the
same time it suffered heavy losses than that of the
market index. The movement of the CAL returns in
the pre-announcement days remained similar to the
movement in the post announcement day.
Meanwhile, the returns dropped significantly some
few days after the announcement of dividend
payment. It can be deduced that the information from
announcement day caused the fall in the returns but
judging from the movement of the returns in both the
pre- and post-announcement days coupled with the
parallel movement to the market returns, it cannot be
conclusively argued that the announcement of
dividend payment influenced the liquidity of the
stock.

Vol-2, Issue-12, 2016
Source: GSE
The movement of the CMLT is also parallel to that
of the market returns. From the Chat above, it can be
seen clearly that the movement of the stock liquidity
is not influenced by any specific day. This is very
strange but it also implied that, the stock prices did
not change significantly throughout the window
period.
Source: GSE
A little abnormal return is found in pre-
announcement period, thus, immediately before
announcement but prior to the event day, scrip
movement correlated with the market. The returns
moved a little upwards right after the announcement
day but remained parallel to that of the market
returns. There is no opportunity exists to earn
superior return from the market. This announcement
cannot yield handsome returns (liquidity) to the
market participants.
Source: GSE
The above chart reveals, there is no correlation
between the scrip movement and index movement.
But during the announcement day market and stock
return movement coincides diminutive. Based on this
news drift, it is difficult to record a significant return,
which is also clear from the above chart. Meanwhile,
immediately after the announcement day, the EGL
stock returns dropped sharply implying decrease in
liquidity. This may likely be due to the information
from the announcement even though the market also
dropped slightly.
Discussion
Share prices are driven theoretically by the same
economic factors of demand and supply. If demand
for a stock is higher than the supply, the price will
move up. Dimson and Mussavian (2000) argued that
the market “appears to anticipate the information,
and most of the price adjustment is complete before
the event is revealed to the market. The findings of
the present study basically highlight as to how the
information from the announcement of dividend
payment affects the liquidity of the stocks. It is
simply not true, that dividend announcement data can
provide a profitable guide to investment timing or
improve a portfolio’s rate of return. Information is
reflected in stock prices so rapidly that published
data tells the investor virtually nothing about the
future change in stock prices. Not only do stock
returns reflect the firm’s dividend data when
published but they also anticipate future dividend
growth to some extent.
The study was undertaken to find out whether the
announcement of dividend result is having any
influence on the stock return. There are variety of
factors that influence the movement of share price
and hence the return. The performance of the
company as disclosed by the dividend result is one
among them. In this study it was tested whether the
announcement of result is having any influence in
liquidity measured as the company returns. Normally
a higher dividend than the previous year dividend
should be welcomed by the market. This should be
associated with greater return after the result is
announced. All higher return after the announcement
cannot say to be due to the dividend results. To find
out the impact of results on returns, the impact of
other factors in returns is to be segregated. The
impact of other factors in return is taken from the
index which is nothing but the market return. The
announcement of dividend is unique and specific to a
company.
From the stock return behavior of 11 companies
studied (7 are discussed above), the return behavior
of only one company moved with the market return.
The announcement of results is said to have an
impact only when there is an abnormal return after
the announcement of dividend results. Hence it can
be concluded that the announcement of corporate
dividend result does not have any impact on the
stock return behavior of companies. By taking this

Vol-2, Issue-12, 2016
announcement of dividend results, no one can
outperform and there is no strategy exists in the
market. Also it is clear from the above analysis that it
seems very difficult to find future path based on the
announcement effects.
5. Conclusions and Recommendation
Conclusions
Findings derived from sample of the present study
clearly show that dividend announcement have
significant impact on stock returns. Announcement
of increase in dividend payments results into rise in
stock price and announcement of decrease in
dividend payments accounts for decline in stock
price around the time of the dividend announcement.
The findings of the study comprehend the research
work done by the renowned scholars whose
references are given at the end on the said topic.
From the above analysis it is concluded that there is
conclusive relationship exist between dividend
announcement and stock returns. The study therefore
failed to reject the null hypothesis since there is no
enough evidence to reject it.
It has been found that there are some firms whose
abnormal return were negative on the dividend
announcement date but became positive immediately
after the dividend announcement date. There are
some other companies, whose abnormal returns were
positive on the dividend announcement date and
some days before and after the announcement date.
There are no instances where dividend
announcement day return was negative but it
remained positive before and after the dividend
announcement date. Overall results indicate that
impact of dividend on dividend announcement date
and few days after were positive. These results
confirm the theoretical background regarding the
impact of dividend on the stock returns. It shows that
dividend distribution is relevant for future liquidity
determination.
Recommendation
As this study provides a detailed analysis of
dividend announcement impact on stock returns, it
can be helpful for investors and investment managers
in understanding the behaviour of market with regard
to dividend announcement. The study of dividend
announcements in several developed markets
conclude that investors react more to dividend
announcement that somehow contradict the
conclusive findings of this study. Therefore it is
recommended that investors should not only depend
on the announcement of dividend since it provides
limited amount of information. The managers of the
firms should also note that the movement of liquidity
(increases or decrease) has no relationship with the
movement in the market.
Further Studies
This study can be further expanded in future in
other areas like impact of merger/acquisitions, stock
splits, stock repurchase and their impact on stock
prices. Future researches could look into the impact
of dividend change announcements on firms’
performance. Other methods may be applied to
investigate this issues to bring out conclusive
findings.
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