Yenshan Hsu, Tai-Hung Su, Ming-Cheng Wu

National Chengchi University

Abstract

    This paper examines the underlying motives for distributing stock dividends by firms listed on the Taiwan Stock Exchange. Both survey research and empirical research are employed to investigate the motives for distributing stock dividends. In survey research aspect, we design one questionnaire, which includes two parts, the financial managers' views and the issuing companies' views. Firstly, we design 13 different statements of managers' views about stock dividends, and we find the statement with the highest level of importance was that stock dividends have a positive psychological impact on investors receiving them. The second highest level of importance was that stock dividends convey favorable information about the firm's future prospects. The third one was that shareholders expect stock dividends to continue once initiated. Secondly, we design 8 different statements of companies' views about stock dividends, and we find that the statement with the highest level of importance was to conserve cash in companies. The second highest level of importance was to signal optimistic managerial expectations about the future.

    On the other hand, we conduct empirical research by event studies toward stock dividend announcements for firms listed on the Taiwan Stock Exchange. The research period ranges from 1995 to 1999. We have collected 474 stock dividend announcements after some screening procedures. The market model is employed to examine the announcement effect. In addition to the ordinary least squares model, the GARCH (1,1) model is employed to cope with the serial correlation of volatility. The result shows that stock price reactions are positive and significant around the announcement period of stock dividends. These results support the signaling hypothesis. We also examine stock price reactions around the ex-dividend date. The result shows that the stock price reactions are significantly positive around the ex-dividend period. These results lend supports to the trading range hypothesis, which posits that more investors will trade the stock when the stock price is around the optimal price range.

Finally, we conduct a cross-sectional regression analyses. These analyses are to investigate the relation between the stock dividend percentage and a variety of financial variables. We find several important results. Firstly, ROE has a positive and significant effect toward the stock dividend percentage. These results indicate that stock dividend percentages signal future earnings of the company. Secondly, the ability to issuing stock dividends also has a positive and significant effect. This reflects that companies with higher ratios of retained earnings to equity are more likely to declare higher stock dividend percentages. Thirdly, the stock price of the issuing firm also shows a positive and significant effect, which seems to support the trading range hypothesis. Fourthly, the cumulative mean abnormal return before the announcement period and the cash owned by the issuing firm also have a positive effect. This result supports the optimal trading range hypothesis and cash substitution hypothesis. Finally, the ratio of net change in total assets in the year of stock dividend announcement has a negative effect, indicating that the conserved cash is not necessarily spent on acquiring equipment and machinery.

Keywords: Stock Dividends, Information Signaling, Trading Range, Ex-dividend Date.

國立政治大學財務管理學系