Stock Returns Reaction to Dividend and Earnings Announcement: Which Event Provide More Predictive Information to Investor’s

Abstract

The objective of this study is to reduce the uncertainty involved in firm’s future earnings performance by scrutinizing the impact of dividend and earnings announcement on stock returns by assembling data from the official website of Karachi Stock Exchange (KSE) over the period 2010-2014. The study employed event study methodology to examine the effect of dividend and earnings announcement on the stock returns around the 41-days event window of both pre and post announcement. The research results revealed that after the dividend announcement, stock prices move upward which is statistically significant and support the dividend signalling theory but in case of earnings announcement the persistent downward drift of stock prices in the post announcement period is observed which is statistically insignificant and offer some support for behavioral finance theory. Overall, the result confirmed that dividend announcement provide more predicative information than the earnings announcement around the firm’s future earnings performance. The study have implications for investors, policy makers and shareholders for their proper strategic decision making to uncovered the uncertainty about the firm’s future earnings performance.

Keywords: Dividend Announcement; Earnings Announcement; Stock Returns; Signalling Effects; Event Study.

JEL Classification: G35; G17; G32;