The Effect of Dividend Announcement on Price Volatility in Listed Stocks on BSE in FYQ4 | Best B-school in Bangalore

Posted by NSR Murthy On 09/03/2022 11:13:57

Introduction- Dividend announcement and price volatility of stocks are closely related due to obvious reasons discussed in this article with reference to the stocks listed on BSE for the quarter ending March 2022. 

What is Dividend?

As defined by Investopedia, the dividend is the distribution of some of a company's earnings to a class of its shareholders, as determined by the company's board of directors. Common shareholders of dividend-paying companies are typically eligible as long as they own the stock before the ex-dividend date. MBA Bangalore

A dividend is a token reward paid to the shareholders for their investment in a company’s equity, and it usually originates from the company's net profits. While the major portion of the profits is kept within the company as retained earnings—which represent the money to be used for the company’s ongoing and future business activities—the remainder can be allocated to the shareholders as a dividend. At times, companies may still make dividend payments even when they don’t make suitable profits. They may do so to maintain their established track record of making regular dividend payments. MBA admission 2022 in Bangalore

Important Dividend Dates

Dividend payments follow a chronological order of events and the associated dates are important to determine the shareholders who qualify for receiving the dividend payment.

  • Announcement date: Dividends are announced by company management on the announcement date, or declaration date, and must be approved by the shareholders before they can be paid.
  • Ex-dividend date: The date on which the dividend eligibility expires is called the ex-dividend date or simply the ex-date. For instance, if a stock has an ex-date of Monday, May 5, then shareholders who buy the stock on or after that day will NOT qualify to get the dividend as they are buying it on or after the dividend expiry date. Shareholders who own the stock one business day prior to the ex-date—that is on Friday, May 2, or earlier—will receive the dividend.
  • Record date: The record date is the cutoff date, established by the company in order to determine which shareholders are eligible to receive a dividend or distribution.
  • Payment date: The company issues the payment of the dividend on the payment date, which is when the money gets credited to investors' accounts

Effect of Dividend Announcement on Price Volatility of Stocks

Since dividends are irreversible, their payments typically lead to money going out of the company’s books and accounts of the business forever. Therefore, dividend payments affect share price, which may arise on the announcement approximately by the amount of the dividend declared and then decline by a similar amount at the opening session of the ex-dividend date. AICTE Approved MBA college in Bangalore

For example, a company that is trading at Rs. 100  per share declares an Rs. 5 dividends on the announcement date. As soon as the news becomes public, the share price shoots up by around Rs. 5 and hits Rs. 105. Say the stock trades at Rs. 109 one business day prior to the ex-dividend date. On the ex-dividend date, it's adjusted by Rs. 5 and begins trading at Rs. 104 at the start of the trading session on the ex-dividend date, because anyone buying on the ex-dividend date will not receive the dividend.

Price Volatility in Listed Stocks on BSE in FYQ4

Bharat Dynamics Limited (BDL): The interim dividend was announced on 27 Jan 2022 and the share prices were shot up from 465.35 to 488.55, a whopping 4.95%, made a high of 503.30 (+ 8%) on 3 Feb 2022, and closed at 439.05 on ex-date 23 Feb 2022 at 5.32% low.

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