The Relationship Between Cumulative Abnormal Returns And Earnings: Evidence From Emerging Markets

This study examines the signaling hypothesis of dividends by testing empirically the market reaction to dividends announcements. Furthermore, this study examines the information content of dividends announcements with respect to future earnings changes for a sample of firms listed at Amman Stock Exchange (ASE) during the period 2005 to 2010. The sample consists of 183 observations and 132 observations for dividend release sample and no-dividend release sample, respectively. The Event Study Methodology (ESM) is applied to examine the market reaction to dividend release announcements. The market model is used to generate the expected returns. Also, the t-test is used to examine the significance of the mean and cumulative abnormal returns. Furthermore, a regression model is used to examine the signaling hypothesis. To test the information content of dividend changes on earnings prospects, we individually incorporate the linear model with CAR to form the model. The findings of the information content of dividends applying the ESM methodology show that there is a significant positive abnormal return on the announcement days. Also, it shows that there is an overreaction straight after the announcement day, then a correcting attempt in the post event and then it goes back to normal, which is consistent with the signaling hypothesis. For the no-dividend release sample, the results show no significant abnormal return on and around the announcement days which is again consistent with the signaling hypothesis. Our results are consistent with AlShattarat et al. (2012) suggestions that there could be value relevance for dividends rather than dividends’ change. Also, the findings present a strong relationship between dividends announcements and the profitability mainly in the year of announcements and the subsequent year, whereas this relationship does not exist in the second year of announcements. The findings of this study could have significant policy implications for Jordan’s existing corporate governance practices and firms’ disclosure environment. The results are specific to Jordan, but they do shed light on the generality of the rival models of dividend policy.