The International Journal of Professional Management - ISSN 20422341
Dividend Analysis using Rent-Extraction Hypothesis: Empirical Evidence from Malaysia
Volume 13, Issue 2, March 2018
Irfah Najihah Binti Basir Malan
PhD (Finance), Universiti Teknologi MARA, Malaysia
William Chua
PhD (Mgmt), MBA, BSc (Maths/Ed), MMIM, MIIKM, Honorary Fellow,
Professor and Doctoral Supervisor, IPE Management School, Paris
Abstract
This research examines the market reaction to changes in the dividend announcements at the Malaysian stock market, formerly konown as Bursa Malaysia. It also investigates the dividend policy using the rent-extraction hypothesis. Rent- extraction hypothesis expects positive abnormal returns for dividend increases, since higher dividends reduce the cash in hand of the ultimate owner. Increases in dividend do contain new relevant information that creates movements in the market and the reactions eventually produce positive abnormal return to the investors. Conversely, a negative abnormal return for announcements of dividend reductions can be expected, since lower dividends increase the cash that the ultimate owner can potentially expropriate for the firm with high ownership concentration. It is essential to explore whether there are differences between market reactions by firms with controlling shareholders and firms with non-controlling shareholders, based on the rent-extraction hypothesis. Data is gathered from a sample of 698 dividend announcements made by 136 firms in the main market between 1990 and 2010. The hypotheses are tested using event study methods and the independent samples t-test. The results showed that the market reacts positively to dividend increases and negatively to dividend decreases. The positive and negative market reactions can be seen from the average abnormal return. The results supported the rent- extraction hypothesis. It is observed that there is a difference between market reactions by firms with controlling shareholders and firms with non-controlling shareholders at increased and decreased dividend announcements.
Key words
Dividend announcement, dividend policy, rent extraction hypothesis, controlling shareholders, non-controlling shareholders, Malaysia
Introduction
Dividend changes are observed from the reaction to share prices which is measured by abnormal return of shares. The dividend announcement is assumed to have information content if the abnormal return is significant towards the market. A positive reaction occurs when information on the dividend announcement creates a market response, where a high profit level is expected in the future.
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