Effect of Dividend Announcement on Shareholders’ Value : Evidence from Saudi Arabian Stock Exchange

Literature suggests that dividend has no impact on shareholders value in the absence of taxes and market imperfections. Hence, companies invest excess funds in positive net present value projects instead of paying out as dividends. Literature also suggests that market valuation of stocks depends on the expected future dividends. If company pays out all earnings, funds for future investment will decrease and dividend may not increase in the future. Moreover, when dividend is taxable, paying more cash would increase the shareholders tax liability. Despite, companies often pay cash dividends to the shareholders possibly to signal any information about the future earnings prospects. Our empirical results based on 178 announcements of dividends between 2001 and 2005 in Saudi Arabia, a non-tax economy, showed that investors lost 2.20 percent of market value after the dividend announcement, although the lost value is recovered from the cash dividend received, and they earned 7 percent of net cash return after recovering the loss of market value. Sub-sample analyses showed that announcement of dividend increase may not signal any good information, while the announcements of dividend decrease and dividend initiation (first-time dividend) may contain information, although the information signal of the dividend initiation is somewhat weaker