The objective of this paper is to determine whether announcing a dividend payment in the Vietnam market provides useful information for the investor. In other words, does an announcement of dividends directly affect the stock price in this market? To evaluate the impact of such an event, a measure of the abnormal return was needed. The observation data used was n = 16 (listed firms), in which there were 71 announcements. The analytical steps follow.
The abnormal return that was used was the difference between the ex-post return of the security and the normal return of the firm during the event window. The normal return was established to be the return that would have been expected if the event had not occurred. The first step was to compute the ex-post stock return during the event window of a 6-day period (plus/minus 3 days). Day 0 was considered to be the announcement day of the dividend payment. Finding the risk-free rate market return of each event and associated beta value was step two. The risk free rate was calculated by the Consumer Price Index (CPI) and the average government bond yield as a percent. The beta coefficient value was found by running 71 regression tests in which the daily stock return and daily market index return were the dependent and independent variables respectively. The market beta (or risk) for an individual stock for the event was found using the correlation between the daily stock return and the daily market index return of a normal period. The daily stock return and the daily market index return were computed based on the daily stock price and daily closing price of VN-Index.
The sign test was one of two common nonparametric tests used. This test is based on the sign of the abnormal return (AR) or cumulative abnormal return (CAR). The use of the nonparametric tests of the abnormal returns may be used since it may be insufficient to assume the normally distribution of returns when confirming the parametric tests. It is necessary to test the probability that the positive average abnormal returns (AAR) following the dividend announcement was larger than 0.5. Therefore the null hypothesis was that the probability was less than or equal to 0.5 while the alternative hypothesis was that the probability was greater than 0.5. This hypothesis was tested in a one sided z-test.
A descriptive statistic is typically used when describing the basic features of data in a study, specifically the distribution’s central tendencies. From January 3, 2006 to December 31, 2009 the range of the VN-Index was 235 to 1170.67. Considering 996 daily closing prices (n = 996), two of the central tendencies were: mean – 608.94 and median – 522.84. The median was lower than the mean. It should be noted that the closing price of the VN-Index during this time was in the lower range since data samples of the financial crisis of 2008 were randomly included. A t-distribution showed the distribution to be skewed to the right (positively skewed). This means that most of the distribution of the closing prices was to the left of the mean. Using kurtosis (description of the shape) to determine how tall and sharp the central peak is found that the kurtosis value was -0.884 indicating a relatively flat distribution about the mean, albeit asymmetrical. Measures of the asymmetry were not significant. The mean was 0.0485 and the median was 0.0326.and median was 0.0485 and 0.0326; minimum and maximum was negative -4.972 and 7.741. Since the mean does not equal the median, both the closing price and the daily return were not in a symmetrical distribution. From January 3, 2006 to December 31, 2009 (996 days) there were 193 Mondays, 200 days for each of Tuesday, Thursday and Friday and 203 Wednesdays. Monday was found to have the lowest negative average daily return (-0.2548%) while Friday had the lowest positive average daily return. Tuesday and Wednesday did not differ greatly however Thursday had the highest average daily return (0.2993%). In finding the difference between Mondays (193) and the other days (793) as well as the difference between Thursdays (200) and the other days (796), the Monday group was negative -0.2548% compared to the other days group of 0.1214%. Similarly, the Thursday group (0.2993%) was compared with the other days (-0.0145). We now question as to whether the differences were large enough to rely on or were they random. With regard to testing Mondays against the other days, the average return for Monday was lower than the other week day’s average return with a difference of -0.3762. Similarly, the average return for Thursday was higher than the other days with an average difference of 0.3139. The t-test value was -2.239 (d.f. 994) giving a critical value at 1960. This t-test value was smaller than at -1.960. Using the t-distribution chart for a two-tailed distribution, and a significance level of = 2.5% and d.f. greater than 100, we continue to have critical value at 1960. Thus, the observed test t-value of -2.239 was smaller than at -1.960. Thursday’s test gave a t-value of 1.892 with critical value of 1.645, 5% significance level and d.f. of 994. There were no other tests of reliable statistical significance. In comparison of Monday with the other weekdays, two-tailed p-value was 0.025 while Thursday with the other weekdays was 0.059 giving more information of the statistical results than the probabilities and thus the percentages for the error probabilities was in the acceptable range and thus reliable. Again, analysis of the other groupings p-values were not in the significant level with t-value smaller than . Thus there is no support for the hypothesis. To summarize, there was a significant difference between Monday/other days of the week and Thursday/other days of the week. The average return for Monday was lower than the other days of the week with the average return for Thursday being higher than the other days of the week. The hypothesis was therefore rejected and there was support for the alternate hypothesis (average return for Monday was not equal to the average return for the other days of the week).
This study purpose of this study was twofold: 1) determining whether an announcement of a dividend payment impacted stock prices and 2) determining if stock prices in the market are randomly determined.
Using a selection of 16 companies (n = 16), there were only two firms Vietnam Fumigation Company (VFC) and Chuong Duong Beverages JSC (SCD) which were found to have abnormal returns and thus be statistically significant at the 5% level. In other words, only these two firms had their stock prices affected by the dividend announcement during the period from 2006 to 2009. While these results do not definitively determine announcement of dividends to be the sole influence on these prices, the results may be used to attract investors.
Secondly, there was significant evidence that the day of the week was influential and thus the event was not random.
With regards to the efficient-market hypothesis (EMH), the hypothesis that the Vietnam market during this period was considered to be weak or inefficient is rejected. The pattern of movement in prices was not random.
Interestingly, the average highest return in the Vietnam market was on Thursday as opposed to the most common day in other markets of Friday. However, the lowest return was on Monday in agreement with most other markets.
Since there was a difference in returns between groups in the week, (the average return on Monday/Thursday and the other days of the week) there is opportunity here for arbitrage to capitalize on the imbalance.
As the abnormal returns were shown to be asymmetrically distributed it is reasonable to consider values which are different from zero as responsible for the unexpected return. It was found that the probability for a positive average abnormal return associated with the event was greater than 5%. Combining the t-and z-test results showed that announcing dividend payments affected the stock prices of the firms, resulting in a slight increase in attracting investors during the specified period. Generally, the change in stock prices are independent of each other and have similar distributions (neither symmetric or normal) which indicate that past movements or trends are not reliable for predictions, and therefore follow a random walk. However, the difference in returns for these groups implies that there is a possibility of arbitrage for this market. The verification of the statistical importance of the day of the week effect provides information which means that the prices were possibly predictable. The Monday and Thursday returns in the Vietnam market tended to be the high and low respectively. This is in opposition to Monday/Friday (low/high) in most other markets The statistical results conclude that evidence exists against the hypothesis of an efficient market in weak form. Therefore, the hypothesis that the stock prices followed a random walk pattern based on the weak efficient market theory was rejected and that there was a pattern in the price variations. Finally, the stock prices in Vietnam market did not follow a random pattern, and the market was not efficient in weak form for the last period, from Jan 03, 2006 to Dec 31, 2009.
Implications of the Conclusion
As has been said, announcing the dividend payment provided information to investors affecting the stock price around the event (dividend announcement). Although the strength of the abnormal return was not strong, it still provided opportunity for arbitrage. Further analysis found that the weekly expected stock return from Monday to Friday tended to be negative and decreasing over average returns. It is surmised that this is due to releasing information at the end of the week which caused the sliding return the following Monday. However, this also has the benefit that unfavorable information can be released late in the day on Friday if firms desire to reduce the effect of the bad news or even to avoid a panicked selling. This characteristic might be used for both the release of good as well as unfavorable information. Further a simple trading strategy has also emerged for investors: buy on Monday and sell on Thursday. This would be particularly effective when looking at the two important dates all investors should watch; investment date and settlement date (T + 1, T + 2 or T + 3) where the settlement occurs 1, 2 or 3 days after the transaction. Here the T + 1 could be used for an individual who wishes to buy stock can delay the purchase planned for Thursday or Friday to Monday. For those wanting to sell stock, sales on Thursday (early session) and re-purchased on Monday (late session) to receive the most benefit. This method can be used by investors who deal in high volatile stocks for the purpose of arbitrages.
The results of this study (dividend payment does impact stock price), adds some potency to the theory of dividend signaling as applied to this market. Thus firms can allude to this result as good news when they wish to appear in possession of strong future prospects for investors. It will take a clever firm to use these results. Since the distribution of daily returns was not symmetrical firms would have to pay close attention to when they release information to investors. Some firms may need to watch and estimate the abnormal returns not only on Monday and Thursday, but on the other days of the week might prove interesting in a company to company experiment. It should be noted that the Vietnam market pays dividends in cash, stocks, or a combination of cash and stocks. This study was directed at announcements of the cash dividend payments only. It would be of interest to further investigate if announcements of dividend payments would also be influential in the other two methods of payout. Further investigations might combine both the Vietnam Stock Exchange along with the Hanoi Trading Center in order to provide larger sample sizes. Another investigation could be the examination based on seasons of the year, or possible monthly effects to note if they also indicate statistical connectivity. This data might also be analyzed to determine a clearer picture for future price movements in the Vietnam Market.