How stock market reacts to dividend surprises: Russian and Indian experience

This paper empirically investigates average reaction of emerging markets of Russia and India to dividend surprises on the post-crisis period 2010-2014. Traditionally, unexpected dividend component has been measured in relation to the "naïve" model, which assumes that the next period expected dividend level equals the previously paid dividend. The study proposes different, rarely applied in the dividend announcements literature analysts’ expectations-based approach to measure unexpected component of a dividend announcement. As a proxy for dividend surprise the difference between the actual dividend and the consensus analyst forecast is used. The research was conducted using event study methodology on the sample of Russian and Indian public companies, which regularly pay dividends. Obtained results of the study provide the grounds to make conclusions about the fact that Russian market on average reacts negatively to both good and bad dividend surprises; good dividend surprises on average trigger positive abnormal returns on Indian stocks, whereas bad and no surprises are associated with negative reaction of Indian market. In this research the results are discussed from the perspective of signaling theory of dividends, markets efficiency, behavioral finance, economic and legal issues. The results of the study could provide market players with an instrument of investments decision-making. For companies it is important to take into account market reaction when deciding upon dividend payments and improvement their dividend policies.