Information Content of Stock Dividends in the Indian Market: Evidence from Operating Performance and Long-Run Stock Returns

Abstract:     
We examine long-run stock returns and operating performance following stock dividend payment by Indian firms from 1991 to 2000. Consistent with the signaling hypotheses, these firms report significant positive announcement return and superior operating performance. Our evidence establishes that the superior performance of bonus issuers is because of the better profit margin they are able to generate in comparison to matching firms during the post-issue period. We also document that announcement of bonus equity shares are associated with increase in future cash dividends. Further we examine the long-run stock return in comparison with a carefully constructed matching portfolio and the significance levels are arrived after comparing with bootstrapped empirical distribution of abnormal return from pseudo portfolios. In contrast to the results from the US markets, the equal weighted as well as value weighted abnormal returns are insignificant. But value weighting is showing positive abnormal returns indicating a delay in the market reaction for large firms.

Number of Pages in PDF File: 32

Keywords: Bonus equity issue, stock dividend, valuation, long-run stock performance, operating performance, information asymmetry, ownership structure

JEL Classification: G14, G35, M41

working papers series