Two essays about mandatory dividend: what does the mandatory dividend have to inform to the market

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Natal-RN 2019

TWO ESSAYS ABOUT MANDATORY DIVIDEND: WHAT DOES THE MANDATORY

DIVIDEND HAVE TO INFORM TO THE MARKET?

Tese de Doutorado apresentada ao Programa de Pós-Graduação em Administração da UFRN como parte dos requisitos para obtenção do título de Doutora em Administração.

Orientador: Vinicio de Souza e Almeida

Natal-RN 2019

Catalogação de Publicação na Fonte. UFRN - Biblioteca Setorial do Centro Ciências Sociais Aplicadas - CCSA

Segantini, Giovanna Tonetto.

Two essays about mandatory dividend: What does the mandatory dividend have to inform to the market / Giovanna Tonetto Segantini. - Natal, RN, 2019.

96f.: il.

Tese (Doutorado em Administração) - Universidade Federal do Rio Grande do Norte, Centro de Ciências Sociais Aplicadas, Programa de Pós-Graduação em Ciências Administrativas. Natal, RN, 2019.

Orientador: Prof. Dr. Vinicio de Souza e Almeida.

1. Dividendos obrigatórios - Tese. 2. Teoria da sinalização - Tese. 3. Teoria de agência Tese. 4. Reação do mercado Tese. 5. Qualidade dos resultados -Tese. I. Almeida, Vinicio de Souza e. II. Universidade Federal do Rio Grande do Norte. III. Título.

TWO ESSAYS ON MANDATORY DIVIDEND: WHAT DOES THE MANDATORY

DIVIDEND HAVE TO INFORM TO THE MARKET?

Tese apresentada ao Programa de Pós-Graduação em Administração da Universidade Fed-eral do Rio Grande do Norte, como requisito para a obtenção do título de Doutora em Administração. Aprovada em: 19/06/2019.

BANCA EXAMINADORA

Prof. Dr. Vinicio de Souza e Almeida (Orientador) Universidade Federal do Rio Grande do Norte (UFRN)

Prof. Dr. Anderson Luiz Rezende Mól (Examinador interno) Universidade Federal do Rio Grande do Norte (UFRN)

Prof. Dr. Renato Henrique Gurgel Mota (Examinador interno) Universidade Federal Rural do Semi-Árido (UFERSA)

Prof. Dr. Luiz Felipe De Araújo Pontes Girão (Examinador Externo à instituição)

Universidade Federal da Paraíba (UFPB)

Prof. Dr. Márcio André Veras Machado (Examinador Externo à instituição)

This thesis is the culmination of years of work and would not have been possible without the help of a number of people. First of all, I would like to thank my thesis advisor, Vinicio Almeida, for his research guidance and comments. I also would like to thank all the suggestions and support of Professors Anderson Mól and Alexandro Barbosa, who participated in my qualification.

I thank Professor Giorgio Gotti for the opportunity of the "sandwich" period in University of Texas at El Paso. Always receiving me very attentively, I was able to learn much during our conversations.

I would like to thank all my professors and colleagues at UFRN. Special thanks to my friends from the Finance Group for comments and stimulating discussions. I have learned a lot from them and their companionship made my Ph.D. experience lighter and pleasant. I also acknowledge the financial assistance from the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (CAPES).

Lastly, and most importantly, I thank my family, who encouraged me and supported me unconditionally throughout this stage in my career and life.

This research aims to investigate the influence of the mandatory dividend rule on the in-formational content of dividend announcements. Initially, it was observed how market react to unexpected quarterly and annual dividend change. Then, it was related the div-idend status to earnings quality. The sample consist in firms listed on Brazil, Chile and Greece, countries that have minimum mandatory rule, from 2000 to 2017. The fundamen-tal and financial data were collected at COMPUSTAT Global and Bloomberg, and analyst forecast are from I/B/E/S. The results show that analysts have optimistic forecasts for the dividends distribution and 81.3% of companies were worried about disclosing dividend equal to or greater than the minimum mandatory. Using the event study methodology, abnormal returns were observed following quarterly dividend announcements that follow quarterly earnings announcements, suggesting that dividends may provide a confirmatory information of preceding earnings announcement. Abnormal returns were observed when annual dividend announcements higher than the minimum mandatory. However, when analyzing the relation of accumulated abnormal returns to dividend announcements under the approaches of Signaling and Free Cash Flow theories, it was not possible to prove that the changes in dividend announcements were related to future changes in results, as the average returns in response to the announcement of the dividend payment were greater in the companies with excesses of investments. The results of the second part of the study suggest that the mandatory dividend rule may reduce the information of div-idend announcement about earnings quality. By adding the mandatory divdiv-idend limits,

persistence, and down earnings management were observed when related to unprofitable companies, which are not require to distribute dividends, and by companies with divi-dends above the minimum mandatory.

Keywords: Mandatory dividend; Signaling theory; Agency Theory; Market reaction; Earnings quality.

A presente pesquisa busca investigar a influência da regra do dividendo obrigatório no conteúdo informacional dos anúncios de dividendos. Para alcançar esse objetivo, verificou-se inicialmente a reação do mercado às variações dos anúncios dos dividendos trimestral e anual. Em seguida, examinou-se a relação com a qualidade dos resultados evidenciados nas demonstrações financeiras. A amostra consiste em empresas listadas nas bolsas do Brasil, Chile e Grécia, países que adotam uma legislação para a distribuição de dividendo mínimo, no período entre 2000 a 2017. Os dados financeiros e de mercado foram coletados na base de dados COMPUSTAT Global e Bloomberg, e as previsões dos analistas foram retiradas da I/B/E/S. Verificou-se que os analistas tem previsões otimistas para a distribuição de dividendos e 81.3% das empresas estão preocupadas em divulgar dividendo igual ou maior que o mínimo obrigatório. Através da metodologia de estudo de eventos, observou-se retornos anormais aos anúncios de dividendo trimestrais que são posteriores aos anúncios de resultados trimestrais, sugerindo que os dividendos assumem um papel confirmatório do resultado evidenciado. Encontraram-se evidências de retornos anormais nas datas dos anúncios de dividendos anuais que são superiores ao mínimo obri-gatório. Porém, ao analisar a relação dos retornos anormais acumulados aos anúncios de dividendos sob os enfoques das teorias da Sinalização e do Fluxo de Caixa Livre, não foi possível comprovar que as variações nos dividendos anunciados estão relacionados a vari-ações futuras nos resultados, assim como, que os retornos médios em resposta ao anúncio do pagamento de dividendos são maiores nas empresas com excessos de investimentos.

idendos pode afetar a qualidade dos resultados financeiros. Os resultados os resultados sugerem que a regra obrigatória de dividendos pode reduzir as informações transmitidas pelo anúncio de dividendos sobre a qualidade dos resultados, uma vez que ao adicionar os limites do dividendo obrigatório, apenas os anúncios de dividendos superiores ao mín-imo obrigatório aumentam a persistência dos lucros e o gerenciamento de resultados para baixo é observado quando relacionado a empresas não rentáveis, que não são obrigadas a distribuir dividendos, e por empresas com dividendos acima do mínimo obrigatório.

Palavras-chave: Dividendos obrigatórios; Teoria da sinalização; Teoria de agência; Reação do mercado; Qualidade dos resultados.

2.1 Sample composition by country and quarter . . . 13

2.2 Sample composition by country and quarter . . . 14

2.3 Descriptive statistics . . . 16

2.4 Summary of descriptive quarterly dividend announcement . . . 18

2.5 Actual, forecast and mandatory changes in current year dividends . . . . 20

2.6 Average abnormal returns and average cumulative abnormal returns for the event around annual dividend announcements . . . 22

2.7 Frequency of dividend announcements relative to earnings announcements 23 2.8 Performance measures for days surrounding dividend announcement dates 25 2.9 Average abnormal returns and average cumulative abnormal returns for the event around annual dividend announcements . . . 27

2.10 Average abnormal returns and average cumulative abnormal returns for the event around annual dividend announcements using the minimum re-quired by law . . . 29

2.11 Descriptive statistics of dividend surprise and earnings surprise by using mandatory required law . . . 31

2.12 Frequency and wealth effects by earnings and dividend sign trio (EDM) . 33 2.13 Regression analysis . . . 37

2.14 Analysis of the relation between dividend surprise and future earnings . . 40

opportunity . . . 42

3.1 Sample statistics . . . 60

3.2 Summary statistics . . . 61

3.3 Correlation matrix of firm-specific variables . . . 62

3.4 Dividends and earnings persistence . . . 65

3.5 Earnings persistence regressions by dividend-mandatory payout portfolio 67 3.6 Univariate results of earnings management by dividend payout status . . . 68

3.7 Dividend payout status and earnings management . . . 70

3.8 Additionally results for dividend payout status and earnings management 71 A.1 Definition of variables . . . 85

1 Introduction 1 2 The influence of mandatory dividend rule on the market reaction to dividend

announcements 5

2.1 Introduction . . . 5

2.2 Literature review and hypotheses . . . 7

2.3 Sample selection and methodology . . . 11

2.3.1 Data . . . 11

2.3.2 Measurement abnormal performance . . . 16

2.3.3 Expected and unexpected dividend announcements . . . 17

2.4 Information content of quarterly dividend announcements . . . 21

2.5 Information content of annual dividend announcements . . . 26

2.5.1 Concurrent earnings and dividend announcements . . . 30

2.6 Analysis of the relation between dividend surprise and future earnings . . 38

2.7 Corroborative evidence from growth opportunity . . . 41

2.8 Conclusion . . . 43

3 Are dividend associated with earnings quality? The influence of mandatory dividend rule 45 3.1 Introduction . . . 45

3.2 Literature review and hypothesis . . . 48 iii

3.3 Research design . . . 53

3.4 Sampling and descriptive data . . . 58

3.5 Empirical Results . . . 64

3.6 Conclusion . . . 72

References 74 A Definitions of variables used in the study 83 A.1 Minimum mandatory dividend measures . . . 83

Introduction

This study aims to examine if the mandatory dividend rule adopted in Brazil, Chile and Greece influence the information content of dividend announcement. The dividend literature has relied mostly on two lines to generate predictions about dividend behavior: the signaling theory and free cash flow hypothesis. The signaling theory argue that there is an information asymmetry between managers and investors about firm’s prospects and dividends reveal some of that information to the market. The free cash flow hypothesis analyze the role of dividend as a disciplinary mechanism by reducing the amount of free cash flow, thus dividend payment may prevent managers to waste cash in negative net present value project. In these contexts, the decision to pay dividend is attributed to the management of the companies, who decide the form and amount by which companies choose to distribute its profits to its shareholders, which may have relevance and economic impact for the agents involved, once that there is a relation between dividend payout policy and company market value (Gordon, 1963; Lintner, 1962).

However, in some cases the dividend payout decision are also mandatory. For exam-ple, the minimum dividend payment is mandatory in Brazil, Chile, Colombia, Greece and Venezuela (La Porta, Lopez-de Silanes, Shleifer, & Vishny, 2000). An explanation for the minimum dividend legislation is due to the protection of the minority shareholder, since

those countries are characterized by a low degree of protection of the minority sharehold-ers, so the minimum mandatory dividend would prevent the possibility of the controller retaining all the profits (La Porta et al., 2000). At the same time, the minimum dividend also has the function of strengthening the capital market by guaranteeing the investor a minimum remuneration (Martins & Novaes, 2012; Tao, Nan, & Li, 2016).

The unique mandatory dividend setting in those countries generate a singularity for the dividends policy of publicly traded companies, making it necessary to adapt theories to the specificity. In this regard I study two aspects that might be partially affected by the mandatory dividend rule: the market reaction and the quality of earnings reported. My primary goal is to empirically assess if the mandatory dividend legislation may affect the informational content that is send to the market.

In the first chapter I extend the literature regarding the market reaction to dividend announcement by analyzing a unique sample that has minimum mandatory dividend rule. The motivation is to explore if the mandatory dividend rule influence on how market react to unexpected dividend announcement. The outcome is that only dividend higher than minimum mandatory is related to significant abnormal market reaction, supporting the hypothesis that regulatory dividend may damage the signaling role of dividend announce-ment.

For that it is estimate the share price reaction to dividend announcement of firms listed on market index from Brazil, Chile and Greece from 2000 to 2017 in an event study. In efficient markets, share price will only react to surprises in dividend announcements. Therefore, an empirical analysis required a model of expected dividend to determine the unexpected dividend. Besides the standard procedure use for modeling dividend surprises by relating the naive model for quarterly announcement and analyst dividend forecast for annual announcement, it is added another dividend surprise that is provided by a regu-latory environment that may deprives the market of much of the information content of dividend distributions. To examine this, the dividend announcements are classified as

higher, lower or equal to the minimum dividend required. Thus, comparing the difference for market reaction, we are able to capture the effect of mandatory dividend rule as a per-ception of investors about information signalling, or the dividend announcement is only consequence of regulation to prevent minority expropriation.

Because the dividend announcement can be concurrent to earnings announcement, than it is also considered the earnings surprise as a control variable to disentangle the impact of the two signal, dividend and earnings, and to examine the interaction among them. And, to analyze if market reaction to dividend announcement may be related to signaling theory or free cash flow hypothesis, it is added the analysis of the relation be-tween dividend surprise and future earnings, and the corroborative evidence from growth opportunity.

Overall, the evidences of the first study suggest that quarterly earnings announcements may drive market reaction and quarterly dividend provide a confirmatory information of preceding earnings announcements. Considering the annual dividend announcement, there is evidence of positive share price drift following dividend higher than minimum mandatory, suggesting that regulatory environment impact on the value relevance of divi-dend announcement information, which implies the pertinence of including the mandatory regulation into future dividend analysis.

Furthermore, the results do not support the signaling theory or free cash flow hypoth-esis. The analysis of the relation between dividend surprise and future earnings does not indicate that dividend announcements changes are informative about future earnings. And, also, even considering the firms investment opportunity, the market does not react different to dividend surprise.

The second chapter looks into earnings quality around the enforcement of dividend rule. P. M. Dechow and Dichev (2002) point out that a high earnings quality is one that accurately reflects the company’s current operating performance, and is a good indica-tor of future operating performance, as well as useful measure to assess the value of the

company. Prior studies report that dividend paying firms present higher earnings quality than non dividend paying firms, indicated by more persistent earnings (Skinner & Soltes, 2011), lower discretionary accruals (Tong & Miao, 2011) and greater earnings informa-tiveness (Guay, Kothari, & Watts, 1996; Subramanyam, 1996). However, the association would change given some factors affecting managers’ incentives to pay dividends (Deng, Li, & Liao, 2017). Therefore, the main goal in this study is to evaluate if managers is altering earnings quality to avoid the discipline imposed by mandatory dividend rule.

This inference is examined with data of listed firms from Brazil, Chile and Greece from 2000 to 2017. To include the mandatory rule in the analysis it is created five vari-ables that characterize dividend payout according mandatory threshold. It is also used the basic association between dividend and earnings. Earnings quality is measured by the persistence of earnings and discretionary accruals. Moreover, the results show that only dividend announcement higher than minimum mandatory conduct to more persistence earnings. Furthermore, there is a weak evidence that dividend payers reduce earnings management compared to no dividend payers firms.

Overall, the empirical analyses do not provide support evidence on the basic relation shown by the prior literature, but also document that the information-providing role of dividends in earnings quality may be weakened if the incentives to pay dividends are dis-torted. The results allow policymakers, academics and government to reflect if minimum dividend regulation is protecting investors from corporate agency conflict.

Therefore, for future works I suggest the continuity of studies that deal with the ef-fect of a regulated dividend payment policy, ratifying that the dividend payout calculated according to the legal regulation must be taken into account as market expectation. In addition, the study also contributed as a reflection to the academy as well as regulators whether the regulatory intervention in dividend is a mechanism to ratify, or not, the oc-currence of agency conflicts.

The influence of mandatory dividend

rule on the market reaction to dividend

announcements

2.1

Introduction

The motivations behind giving back cash to shareholders have been a contentious is-sues. The cash flow signaling and the free cash flow hypotheses are the most prominently theories used to explain the information convey by dividend announcement. However, theses two hypotheses are developed on a market where firms can independently de-termine how much profit will be paid through dividends, adjusting then to signal their prospect, which might be an information unknown previously. Hence, the mandatory rule may suggest a diminished role for dividend announced, once part of the unexpected information becomes expected given the legal constraint.

Brazil, Chile, Colombia, Greece and Venezuela are listed as countries where the div-idend are legally mandatory (La Porta et al., 2000). 1 In these countries, all firms must

1_{We exclude Venezuela because of market instability and Colombia by limited number of observations,}

allocate a certain amount of their earnings as dividends. Given this legal difference, it is examine the influence of mandatory minimum rule on the effect of dividend announce-ment on market reaction.

In Brazil, the corporate Law (Lei das S.A.- 6.404/76) present that shareholders are entitled to receive as mandatory dividend, in each fiscal year, the portion of profits es-tablished in the bylaw. If the bylaw is omitted, 50% of the adjusted net income. must be distributed as dividend, and if the General Assembly decides to change it, the manda-tory dividend may not be less than 25% of the adjusted net income. In Chile, the secu-rity law (18.046/81) require a mandatory 30% dividend payout ratio for all companies with positive net profits. In the case of Greece, the law 3.604/2007 determines the min-imum mandatory dividend equal to 35% of the net income minus regulatory reserves (Asimakopoulos, Tsangarakis, & Tsiritakis, 2015).

Nevertheless, all the demands can be waived by shareholders approvals. In Brazil, if the management inform in the General Shareholders Meeting that mandatory dividend is incompatible with the financial situation of the company and the shareholders approve it, the management team has to argue to the Brazilian Securities and Exchange Commission (CVM) that dividend payment might lead the firm into financial distress. Also in Chile, the minimum amount only can be paid less if it is approved on General Shareholders Meeting by all shareholders (Lefort, 2008). In Greece, it is a matter of 65% of the votes for less than a minimum, but 80% for non-dividend distribution (Dasilas & Leventis, 2013).

The study contributes to the existing literature on dividend signaling. Firstly, it add empirical results related to the informational content of dividend under mandatory rules, which may contribute to the understanding of dividends under different jurisdictions. An outcome is the distinction between dividend announcements that are equal to minimum mandatory and those that are different. This differentiation is in line with prior studies that indicate that changes in dividend announcements should consider the legal framework in

which dividend are determined. Finally, the research also contributes as a reflection to the academy as well as regulators whether the regulatory intervention is a mechanism to curb agency problems.

The rest of the chapter is organized as follows. Section 2.2 presents the theoreti-cal context of dividend policy decisions, some key empiritheoreti-cal contributions to the litera-ture and the development of the hypotheses. Section 2.3 presents the sample procedures adopted. This section also provide how the abnormal and cumulative performance is measured and descriptive statistics of unexpected dividend announcements and the rela-tion with minimum mandatory dividend threshold. Secrela-tion 2.4 shows the results for the analysis of the information content of quarterly dividend announcement, while the results for annual dividend announcement are show in Section 2.5. The analysis of the relation between dividend announcement and future earnings is provide in Section 2.6 and corrob-orative evidence from growth opportunity is in Section 2.7. Finally, the paper is concluded in Section 2.8.

2.2

Literature review and hypotheses

It has been a puzzle why companies choose to pay dividend and why investors are so interested in them (Black, 1976). In perfect and complete financial market, Miller and Modigliani (1961) affirm that the firm value is not affected by dividend policy. However, empirical results evidence a significant and positive relationship between announcements of dividend changes and stock price movements (Aharony & Swary, 1980; Haw & Kim, 1991; Pettit, 1972).

One explanation for market reaction to changes in the dividend payments is provide by the cash flow signaling theory (CFS) of Bhattacharya (1979) and Miller and Rock (1985). The authors argue that managers change the level of dividend payments as a costly signal for future earnings change. The signaling costs are function of the differential

tax treatment of dividend and capital gains and the financial costs of raising funds to perform their obligations. Therefore, investors evaluate changes in dividend payments as a source of information of management’s assessment of company’s future prospects, the costs encourage managers to tell the truth about firm’s expected cash flows (Aharony & Swary, 1980).

A positive impact, however, is also consistent to the free cash flow hypothesis. Due to the separation between ownership and control, managers may not always act in the best interest of firm’s investors. The agency theory attributes to dividend a control function to mitigate managerial discretion. Jensen (1986) argue that firms with substantial free cash flows will have a tendency to overinvest by approving unprofitable projects, and dividend has a role to reduce free cash flow. Easterbrook (1984) adds that dividend commitments may force management to raise external capital for new projects, thereby inflicting mar-ket discipline on the firm. Hence, the marmar-ket positive association to dividend changes reflects the firm’s intention on mitigate investor concerns about overinvestment (Lang & Litzenberger, 1989).

Yet, the differences between the institutional settings lend caution to generalizations across different countries. Amihud and Murgia (1997) and Al-Yahyaee, Pham, and Walter (2011) explore the no tax-disadvantaged of using dividend to signal information in Ger-man and OGer-man, respectively. Although the dividend is associated with a lower cost which predict that dividends are not informative, their results show a positive market reaction. Indeed, Amihud and Murgia (1997) conclude that dividends in Germany provide infor-mation of companies’ current earnings in addition to what is disclosed in the financial statements. Al-Yahyaee et al. (2011) add that because of low corporate transparency and the lack of analyst, dividend announcements are used by investors as information-signals, even when there are no tax difference between dividend and capital gains.

Dewenter and Warther (1998) explore the effect of differences in information asym-metry and agency conflict between Japanese and US firms in the content of dividend

announcements. The results show that in Japan the majority of the shareholders are quasi insiders, consequently firms are less reluctant to change dividend payments suggesting that dividends are not use as a signal of information or as a disciplinary mechanism. Thus, the event study of Japanese dividend changes announcements experience a smaller stock price reaction than are the US announcements.

Market-oriented research with mandatory dividend showed different results. In Brazil, Novis Neto and Saito (2003) show a positive relationship between high dividend yield and the cumulative abnormal return. Portfolios compose by firms with low dividend yield and medium-yield do not present 3 days event abnormal return, however, the study has not consider the mandatory threshold as an influence of information content on dividend pay-ment. In Greece, Dasilas and Leventis (2011) observed market reaction to dividend an-nouncement only when firms paid out dividend above the minimum required. Their result is an evidence that minimum mandatory influence the information content of the divi-dend announcement. In China, after the regulatory intervention that implement a semi-mandatory dividend rule, the cumulative abnormal return around dividend announcement was observed only when dividend was not conditional to the new rule (Tao et al., 2016). This discussion leads us to the following hypothesis:

H1: The mandatory dividend rule is associated with reductions in market reaction to unexpected dividends announcement.

Another contrast to U.S. market is the concomitant announcement of dividend and earnings. In Australia, How, Teo, and Izan (1992) and Michayluk, Neuhauser, and Walker (2017) provide evidence that stock market attributes higher returns to dividend and earn-ings signals that corroborates each other compared to the mixed signal. Unlike in Japan, Conroy, Eades, and Harris (2000) finds that earnings dominate the explanation on stock price reaction, and only unexpected future dividend contribute to influence market re-sponse. Additionally, G. Chen, Firth, and Gao (2002) explain that cash dividend has limited signaling role when the amount paid vary a lot, which diminish its role as a signal.

Michayluk et al. (2017) also report a reduction on market reaction the more often the un-expected dividend is repeat, even after controlling for earnings-related information. Thus, we expect the second hypothesis:

H2: The abnormal announcement returns are asymmetric depending on whether the earn-ings and dividend surprise are positively signalling, negative or mixed.

The following hypotheses relate the market reaction to dividend announcement based on theoretical interpretations of cash flow signaling and the free cash flow theory. With these tests, dividend announcements can be interpreted as a signaling and / or monitoring device, or neither.

The signaling information to investors via dividend announcements predicts that divi-dend changes convey information about cash flows. Indeed, dividivi-dend increase (decrease) conveys favorable (unfavorable) information about past and current earnings (Benartzi, Michaely, & Thaler, 1997) and future earnings (Nissim & Ziv, 2001). On the other hand, the free cash flow theory suggest that dividend changes regard information about firm’s future investments (Lang & Litzenberger, 1989). Thus, firms with low investment oppor-tunity should increase dividend to avoid investments in projects with negative net present values, therefore increase in dividend induce positive market reaction (Jensen, 1986).

In an attempt to differentiate the cash flow signalling and free cash flow theory, Lang and Litzenberger (1989) examine the market reaction to dividend changes controlling by growth measurement. The free cash flow hypothesis predicts that the average abnormal return in response to dividend change is larger for firms with low growth opportunity than for higher growth. Complemented, Denis, Denis, and Sarin (1994) and Lang and Litzenberger (1989) explore analyst earnings forecast to verify if investors anticipate in-formation by dividend changes.

Nevertheless, it is not expected that unexpected dividend changes that is related to minimum mandatory follow the same effect on stock prices as documented in countries such as the U.S., where firms are not legally obligated to disgorge dividend. Tao et al.

(2016) results show that the information content of dividend surprises is significantly af-fected by the unique semi-mandatory dividend policy in the Chinese stock market. Thus, we state the following hypotheses:

H3: Dividends can play a signaling role when unexpected dividend increase shows the firms’ future cash flow, thus, both abnormal stock returns and changes in future earnings should be positively related with unexpected changes in earnings and dividends.

H4: Dividends can be explained by free cash flow theory when expected mandatory div-idend announcement might influence the market reaction according to the growth oppor-tunities.

2.3

Sample selection and methodology

2.3.1

Data

To construct the sample, I start with all companies that are listed on the countries index from 2000 to 2017. For Brazil it is considered the Ibovespa Brasil Stock Exchange Index (Ibov Index) as country index; For Chile it is use the Santiago Stock Exchange IPSA In-dex (IPSA InIn-dex); and, Greece the Athens Stock Exchange General InIn-dex (ASE InIn-dex). Venezuela was excluded because of market instability and Colombia by limited obser-vations of dividend announcements. Companies also had to follow these criteria to be included in the sample: (a) has to have dividend data available on Bloomberg and I/B/E/S International; (b) firm’s financial data for at least 2 years of continuous and non missing data; (c) trading data available in the COMPUSTAT Global Security Daily Database.

In order to isolate the information of dividend announcement, it is observed the quar-terly and annual dividend announcement. The quarquar-terly dividend information is retrieved from Bloomberg R _{database. It is assign dividend payments to the quarter in which they}

international edition of the I/B/E/S detail file. In both cases, the major issue to consider is whether dividend announcements provide information beyond that already provided by earnings numbers. In this way, we distinct dividend announcement that precede, follow or accompany earnings announcements within any given period (quarterly or annual). In addition to I/B/E/S dataset, we required stock price, daily trading volume, actual earnings per share (EPS) and firm-fundamental data from COMPUSTAT Global.

Panel A of Table 2.1 reports a sample of 3,983 quarterly dividend declared spanning for a total of 293 firms from Brazil, Chile and Greece over the first quarter of 2000 to the fourth quarter of 2017. The average dividend yield declared per quarterly is 1.48%, in which Greece presented the highest value and Brazil the lowest. Unlike Chile and Greece that only declare regular cash dividend, in Brazil dividend can be declare as regular cash or interest on equity, or both. The distinguishing feature of interest on equity is that, under certain conditions, it is tax deductible at the corporate level, but taxed at personal level at the rate of 15 percent. Hence, the tax burden provides an incentive for firms to distribute cash to shareholders as interest on equity 2. The Brazilian sample of payment support the role of tax as determinants in payout policy (Boulton, Braga-Alves, & Shastri, 2012). Most of Brazilian firms’ payment are made as as interest on equity, 42.4% of payments is only interest on equity, 21.7% is a combination of of interest on equity and dividends, and 35.9 percent of sample firms paid only dividends to investors.

2_{The total amount distributed as interest on equity is limited to the greater of (a) fifty percent of the}

current period’s earnings before interest on equity and taxes and (b) fifty percent of retained earnings plus earnings reserve before the current period’s earnings.

Table 2.1: Sample composition by country and quarter

Panel A. Descriptive observation according to the quarterly dividend announcement

Unique Dividend Dividend Regular cash Interest income Regular + Country Firms declared Yield % % Interest (%) Brazil 104 2,400 0.92 35.9 42.4 21.7 Chile 48 521 1.15 100 0.0 0.0 Greece 141 1,062 2.91 100 0.0 0.0 Total 293 3,983 1.48 61.4 25.5 13.1 Panel B. Persistence of dividend declared per quarter

Continuous dividend declared

Country 1Q 2Q 3Q 4Q 05-08Q 9+Q Brazil 7.3% 12.7% 14.8% 4.9% 9.6% 50.8% Chile 83.1% 13.1% 3.8% 0.0% 0.0% 0.0% Greece 96.2% 3.8% 0.0% 0.0% 0.0% 0.0% Total 40.9% 10.3% 9.4% 2.9% 5.8% 30.6% Note: Panel A reports the number of unique firms by country, as well as, the number of firm-quarter that declared dividend payments in the period of first quarter of 2000 to the fourth quarter of 2017. Dividend yield is the average dividend yield (%) per quarter. Regular cash and Interest income rep-resents the type of dividend announcement. The amount of dividend declared can be pay as regular cash or interest on equity, or both. In Panel B, the 1Q column shows the percentage of firms that only declared dividend in one quarter; the 2Q column show the percentage of firms that declared dividend in two following quarter; the following columns report the persistence of dividend declared per quarter.

Panel B of Table 2.1 shows the persistence of dividend declared over quarterly. Most of firms from Chile and Greece paid dividend only in one quarter each year from 2000 to 2017, 83.1% and 96.2%, respectively. Instead in Brazil, dividend payments are more persistent, only 7.3% of firms only declared dividend in one quarter, and 50.8% paid dividend in every quarter for over 2 years.

Annual data is report on Table 2.2. The Table provides the total of 1,560 firm-year observations of dividend announcements according to country and year. The observa-tions referee to 189 unique firms, in which 89 are from Brazil, 26 from Chile and 83 from Greece. Further, the analyses focus on annual dividend announcements because most firms in the sample pay annual dividends and also because DeAngelo and DeAngelo (1990) argue that most of the statistical evidence and managerial surveys indicate that dividend policy is more often determined at fiscal year-end. It is also important to recog-nize that the sample under analysis may be biased toward companies that have dividend analyst’s forecast available on I/B/E/S database.3

Table 2.2: Sample composition by country and quarter

Firm-Year Dividend payers Net income consolidated Year Brazil Chile Greece Total N % N % 2000 13 6 5 24 17 70.8% 22 91.7% 2001 20 2 10 32 16 50.0% 30 93.8% 2002 20 2 9 31 15 48.4% 22 71.0% 2003 21 1 12 34 28 82.4% 33 97.1% 2004 27 1 18 46 21 45.7% 44 95.7% 2005 34 2 47 83 48 57.8% 81 97.6% 2006 37 4 59 100 58 58.0% 96 96.0% 2007 50 10 48 108 65 60.2% 102 94.4% 2008 51 9 46 106 57 53.8% 92 86.8% 2009 62 11 46 119 80 67.2% 107 89.9% 2010 64 16 42 122 57 46.7% 104 85.2% 2011 72 19 26 117 74 63.2% 99 84.6% 2012 70 17 20 107 79 73.8% 86 80.4% 2013 71 19 21 111 67 60.4% 91 82.0% 2014 68 13 31 112 17 15.2% 87 77.7% 2015 67 14 21 102 76 74.5% 79 77.5% 2016 66 16 27 109 76 69.7% 88 80.7% 2017 66 15 16 97 21 21.6% 82 84.5% Total 879 177 504 1,560 872 55.9% 1,345 86.2% Note: The final sample is 1,560 company-year observations ranging from 2000-2017. The ob-servations referee to 189 unique firms. Dividend payers represents the percentage of firms i in year t that announced dividend different than zero provide by the I/B/E/S database. Net income consolidated represent all firms-year observations that disclosure Net Income/Loss Consolidated in COMPUSTAT Global higher than zero. N is the number of observations and % represents the percentage of N in relation to total.

Table 2.2 show that almost 56 percent of dividend announcement are different than zero, which represent dividend payer firms. It also provide information of whether the company have issued earnings in the same year. Dividend mandatory rule impose that profitable firms disgorge dividend, without force unprofitable firms to pay. Over the years, although more than 86% of companies disclosure positive net income, not all of them had non-zero dividends, the dividend announcement oscillated out ranging from a high 82,4% in 2003 to a low of 15.2% in 2014.

Table 2.3 present summary statistics of firms’ characteristic for the final sample that is used to control the market response to dividend announcement in line with other studies: firm’s size (Amihud & Li, 2006; Cruz, 2003; DeAngelo, DeAngelo, & Skinner, 2004); firm’s leverage ratio (Andres, Betzer, Bongard, Haesner, & Theissen, 2013; Easterbrook, 1984; Jensen, 1986); profitability (Fama & French, 2001); and, IFRS dummy variable

(Hail, Tahoun, & Wang, 2014).

The logarithm of market value of equity is added as a measured for firm size. Ac-cording to DeAngelo et al. (2004) the use of dividend as a way to communicate with stockholders should occur primarily in small firms, which are relatively unknown firm with limited access to financial press. Amihud and Li (2006) explain that larger firms usually receive more attention by analysts and investors, which reduces the incremental information provided by the dividend changes. However, a positive coefficient is ex-pected based on free cash flow hypothesis, Kato, Loewenstein, and Tsay (2002) address that larger firms are consider more mature, with more free cash flow, and more likely to be overinvestors, so, a positive effect is expected to dividend announcements of large firms.

Firm’s leverage ratio is included as a control variable to mitigate the overinvestment problem (Andres et al., 2013). According to Jensen (1986), debt can be regarded as a substitute for high payout levels, once commit firms to disgorge cash and constrains man-agers from investing free cash flow in negative net present value projects. Furthermore, high debt also increase the level of monitoring by capital markets, which may reduce agency costs (Easterbrook, 1984). Leverage is the ratio of the sum of short and long term debt divided by book value of equity

Additionally, it is used return on asset (ROA) to measure the firms profitability. Denis and Osobov (2008); Fama and French (2001) report that dividend payers tend to be more profitable than nonpayers. Finally, IFRS dummy variable is included following Hail et al. (2014) conclusion that after an improvement of the common information in the economy by adopting the international accounting standards, managers as well as investors rely less on dividend payouts, thus we expect negative coefficient.

Table 2.3: Descriptive statistics

N Mean SD Median Min Max Dividend yield 1,560 0.011 0.015 0.001 0.000 0.105 Dividend zero 1,560 0.441 0.497 0 0 1 Loss 1,560 0.138 0.345 0 0 1 Firm-specific Ln(Market value) 1,560 9.139 2.672 9.059 2.382 17.447 Tobin’s Q 1,560 4.319 42.202 1.250 0.343 1015.493 Leverage 1,560 1.277 3.029 0.784 -57.160 45.161 ROA 1,560 0.090 0.106 0.076 -2.022 0.767 IAS/IFRN 1,560 0.724 0.447 1 0 1 Note: This table presents the descriptive statistics of final sample firms’ characteristic. Dividend yield is dividend per share over the stock price ten days prior to dividend announcement. Dividend zero is equal 1 if dividend announcement is equal zero and zero otherwise. LOSS represent dummy for net income lower than zero. To measure the firm size we use the logarithm of market capitalization at fiscal year end. Tobin’s Q is defined as the market value of the firm’s equity plus total assets minus book value of equity, all divided by total assets. The firm’s leverage is defined as the sum of short and long term debt divided by book value of equity. ROA is the return on assets at fiscal year end. IAS/IFRS is binary variable equals to 1 if accounting standard is IAS/IFRS rather than local standard, and zero otherwise.

From all dividend announcement 44.1% are equal zero, however, only 13.8% of firms-year observations are unprofitable. The average dividend yield is 1.1%, although if con-sidering only the dividend payers, the dividend yield increase to 1.9%. Regarding firm’s characteristics, we observe in Table 2.3 that, on average, firms in the sample are large, profitable, with high growth opportunity and high debt finance. And, most have already adopt the international accounting standard (IFRS).

2.3.2

Measurement abnormal performance

The event-study methodology of S. J. Brown and Warner (1985) is used to measure the stock price reaction to the dividend announcement. The event date, day 0, is defined as the date of the dividend announcement. The abnormal return is estimated using the following equation 2.1:

ARi,t = Ri,t− (αi+ βiRm,t) (2.1)

t, and Rm,t is the return of the market portfolio on day t, and αi and βiare the estimates

of the intercept and slope, respectively, for firm i from a market-adjusted return model estimated using 150 daily returns calculated using the interval from 160 days before the announcement to 10 days before the announcement. 4. Following Conroy et al. (2000), Tao et al. (2016) and Michayluk et al. (2017), we use three-days abnormal return of div-idend announcement as the cumulative abnormal returns (CAR(−1, 1)), where day t = 0 is the announcement day. The AR and CAR are modeled as a function of unexpected div-idends and earnings, and their interaction, as a way to measure the information content of those announcements and the efficiency in with which this information is incorporated into stock price.

2.3.3

Expected and unexpected dividend announcements

Dividend announcements convey information to market, however, only the unex-pected part of the announcement is informative. Previous studies use the naive model to estimate dividends changes. This approach expects no change in dividends from on quarter to another once managers are reluctant to change them, unless, they have reasons to expect a significant change in the future prospect of the firm (Lintner, 1956). There-fore, if firms pay dividends each quarter, the expected dividend change is typically small, so dividend in previous quarterly tend to be a proxy for the market’s expectations on the next dividend, Di,q−1= Di,q. Thus, each announcement is categorized using the deviation

of the current dividend from the expected dividend, normalized by stock price ten days before the announcement (Aharony & Swary, 1980; Amihud & Li, 2006; Andres et al., 2013). Hence, a favorable change is when current value exceeds expected dividend by more than +0.5%, and if the actual is less than 0.5% less than expected the announce-ment is designated as bad news. Those announceannounce-ments where the dividend changes is

4_{For Brazil the Ibovespa Brasil Stock Exchange Index (Ibov Index) is used as a proxy for the market}

portfolio; For Chile it is used the Santiago Stock Exchange IPSA Index (IPSA Index); and, Greece the Athens Stock Exchange General Index (ASE Index).

in the range of ±0.5% are designated as no news. The range of ±0.5% is adopted to compensate for rounding errors (Amihud & Li, 2006; Campbell, Lo, MacKinlay, et al., 1997).

Table 2.4 presents summary statistics for all quarterly dividend changes over the entire sample period. In our sample, about 1,685 of 3.983 (42.3%) of quarterly dividend remain unchanged. This percentage of steady dividend announcement is similar to Tao et al. (2016) results of semi mandatory dividend in China, but it is less than that reported by previous studies, 86.67% by Nissim and Ziv (2001) and 52% to 78% by Andres et al. (2013). Dividend increase represent 52.1% of all quarterly dividend observations and the 223 dividend decrease represent 5.6%. Lintner (1956) and DeAngelo, DeAngelo, and Skinner (1996) have documented the prevalence of dividend increase over dividend decrease as a consequence of the reluctance to cut dividend.

Table 2.4: Summary of descriptive quarterly dividend announcement

Regular Interest Regular + Total Category cash on equity Interest (dividend change) Dividend decrease 91 114 18 223 No dividend change 750 661 274 1,685 Dividend increase 1,604 242 229 2,075 N of declared dividend 2,445 1,017 521 3,983 Note: Descriptive analysis for unexpected dividend change. Unexpected dividend change is the difference between quarterly declared dividend and expected dividend. Declared dividend is the dividend paid in one quarter register on Bloomberg database. Expected quarterly dividend is equal to previous quarterly dividend paid. The dividend differences are standardized by the stock price ten days prior to the declared dividend date. Percentages that are in the range of ±0.5% reflect rounding changes.

Nevertheless, the type of dividend payment seams to influence the unexpected div-idend change. 65 percent of divdiv-idend paid as interest on equity maintained a steady dividend based the previous quarterly. While only 30.7 percent of regular cash present no change. Despite this, unexpected dividend increase observations are greater than the unexpected dividend decreases in both dividend announcements type.

However, mandatory dividend is determined on annual bases. In this sense, we also look to annual announcement in order to test the influence of mandatory dividend rule

on market perception about the content of dividend announcement. Thus, it is require a model for expected dividends. Conroy et al. (2000) and Andres et al. (2013) argue that annual dividends are less smooth than quarter dividend, therefore, the average analysts’ forecast is a more accurate predictor of actual dividend because includes recent financial information available to market participants.

To measure the market expectation for annual dividend is used the arithmetic mean of the final forecast made by analysts following a firm prior to the dividend payment provide by I/B/E/S, FDi,t. Than, the actual dividend announced is compared to the analysts

fore-cast to define the unexpected dividend surprise, (DivSur prisei,t). Following Conroy et al.

(2000), a dividend surprise is the difference between firm’s dividend annual announced value (Di,t) and average analysts’ forecast (FDi,t) of Di,t divided by stock price ten days

before the announcement, DivSur prisei,t = (Di,t− FDi,t)/Pi,−10. A dividend surprise can

be either good or bad news. It is considered a good news if DivSur prisei,t > 0.5% and

bad news if DivSur prisei,t < −0.5%. The actual value in the range of ±0.5% of forecast

is designated as no news, suggesting a rounding change (Amihud & Li, 2006; Campbell et al., 1997).

Moreover, to test for the interaction or corroboration effect of minimum mandatory dividend on share price I re-define the intervals for unexpected dividend change. Un-like in the U.S., where firms can independently determine how much profit will be paid through dividends, the mandatory rules enforce profitable firms to allocate a certain level of their earnings as dividends, without forcing unprofitable firms to pay. The amount paid as mandatory dividend (MandDivi,t) is calculate as percentage of the annual profits based

on each country mandatory rule.5 The difference between of actual dividend announced and the minimum mandatory dividend scaled by stock price ten days before the announce-ment date is named Di f _Mandatoryi,t.Based on the difference, three dummy variable are

created. The variable Minimum_Mandatory is equal 1 if the dividend announcement is

equal to mandatory dividend, and zero otherwise. If dividend announced is higher, we as-sign one as Higher_Mandatory, and zero otherwise. And Lower_Mandatory equal one if dividend announced is less than minimum mandatory. A dividend less than the minimum required can be announced if the shareholders’ meeting approves. So, the investors may condition their interpretation of new information based not only on the change between of analysts’ forecast and the actual dividend announced, but also considering the minimum legal threshold.

Table 2.5 presents information on the relation between actual, forecast and mandatory dividend. The analysis is report for firms that announced non-zero dividend. The changes show in the Table are scaled by share price ten days before the dividend announcement date.

Table 2.5: Actual, forecast and mandatory changes in current year dividends

Measure of change Negative No change Positive Current dividend minus last year’s dividend 12.2% 44.5% 43.3% Analyst forecast of current dividend minus last year’s dividend 7.8% 43.9% 48.3% Current dividend minus Analyst forecast 26.0% 59.1% 14.9% Current dividend minus mandatory current dividend 18.7% 46.4% 34.9% Note: The sample includes only non-zero dividend announcements. This Table presents the analysis on actual dividend changes and how it is related to analysts dividend forecast and the minimum mandatory dividend. The dividend differences are standardized by the stock price ten days prior to the dividend announcement date. The entries are percentages of the dividend payers sample observations and they can be negative, positive or no change. Percentages that are ±0.5% reflect rounding changes.

The first row of Table 2.5 shows that for 44.5% per cent of the non-zero dividend has no change in dividend per share from one year to the next. It also shows that dividend increases outnumber decreases by more than three and half to one (43.3% against 12.2%). This is consistent with international analysis that managers are reluctant to reduce them. Comparison of first row with the second indicates that analysts forecast almost the same frequency of dividend change, indeed, they are more optimistic. On balance, the third row shows that analysts are accurate in almost 59% of the time, indicating as a better predictor than the previous dividends. P. Brown et al. (2008) results have show that I/B/E/S dividend forecast are an accurate estimate of the actual dividend as evidence by the low forecast

error. Farther, it is possible to observe a concern regarding the mandatory threshold, 81.3% of the companies seek to announce at least the minimum or more than the minimum legal required.

2.4

Information content of quarterly dividend

announce-ments

Using the naive dividend expectation model, the quarterly dividend announcement are divided into three subsets: no change in dividends, dividend increase, and, dividend decrease. The daily average abnormal return (AR) for the event period (T-5 to T+5) around the dividend announcement are presented in Panel A of Table 2.6. Panel B presents the cumulative abnormal returns (CARs) for two event windows, namely (T−1,T+1) and

(T0,T+1). The accumulation of abnormal reactions around the event day aims to capture

the entire information content of the announcement. The t-statistics presented indicate whether the AR or CARs are significantly different from zero.

The first column (all cases) in Panel A of Table 2.6 presents the results for the entire sample of 3,983 quarterly dividend announcements. All the event period days present AAR positive and statistically significant, with the exception of the announcement day (T0). Unsurprisingly, for the increasing dividend cluster, column fourth, all abnormal

re-turn are positive and significant, including the day of the announcement, which present an excess return of 0.469% and significant at 1 percent level. Whilst, for the decreasing dividend announcement and no change announcement, second and third columns respec-tively, the AARs are mostly insignificant. For the decreasing dividend announcements the average market reaction is significant on the two days preceding the announcement day T0, but are insignificant on the day and following. Finally, the ARRs manifested

Table 2.6: Average abnormal returns and average cumulative abnormal returns for the event around annual dividend announcements

Panel A. Average Abnormal Returns (AAR) around dividend announcement date Event day All events Dividend Decrease No Change Dividend Increase -5 0.150*** 0.128 0.086 0.205*** (4.15) (0.85) (1.60) (3.95) -4 0.173*** 0.142 0.146*** 0.199*** (4.75) (1.05) (2.70) (3.80) -3 0.164*** 0.176 0.018 0.281*** (4.05) (1.30) (0.35) (4.40) -2 0.169*** 0.339** 0.102* 0.205*** 4.75 2.15 1.9 4.15 -1 0.207*** 0.592*** 0.128** 0.230*** (5.75) (3.40) (2.50) (4.45) 0 0.167 0.238 -0.215 0.469*** (1.00) (1.35) (-0.55) (7.85) 1 0.406*** 0.142 0.152*** 0.641*** (9.85) (0.80) (2.80) (10.30) 2 0.193*** 0.213 0.151*** 0.224*** (5.45) (1.60) (3.10) (4.20) 3 0.197*** 0.352* 0.127*** 0.236*** (5.25) (1.70) (2.55) (4.30) 4 0.113*** -0.025 0.025 0.198*** (3.00) (-0.20) (0.50) (3.45) 5 0.131*** 0.407*** -0.002 0.208*** (3.25) (2.70) (-0.05) (3.40)

Panel B. Average Cumulative Abnormal Returns (CARs)

Event window All events Dividend Decrease No Change Dividend Increase CAR (-1,+1) 0.779*** 0.972** 0.066 1.338***

(4.30) (2.50) (0.15) (11.35) CAR (0,+1) 0.572*** 0.380 -0.063 1.109***

(3.25) (1.35) (-0.15) (11.55) Note: Panel A presents the average abnormal return for the event period (T−5, T+5)

around the quarterly dividend announcement. Panel B show the average cumulative ab-normal returns for two event windows. The first column (all events) presents the results for the entire sample of 3,983 quarterly announcements, while the second, third and fourth columns present the estimated abnormal returns for the dividend decrease (N=223), no change (N=1,685) and dividend increase (N=2,075), respectively. t-statistics are reported in parentheses and indicate if abnormal return is different from zero, and ***, **, and * indicate significance at the 1, 5, and 10% levels, respectively, using a two-tailed t-test.

for no change cluster follow the all events results, they are significant around dividend announcement but not on the announcement day.

Panel B presents the cumulative abnormal returns (CARs) for two event windows, CAR(-1,1) and CAR(0,1). Considering all events, CARs ranges from 0.572% to 0.779% highly significant (p < 0.01). Dividend increase also present positive and significant CAR, drift from 1.109% to 1.338 % significant at 1 percent level. Unchanged dividend an-nouncement follow the expectation of CARs not different than zero. However, the CARs for negative change do not present the sign we expected, they are positive but not always

significant. Bozos, Nikolopoulos, and Ramgandhi (2011) suggest that reactions to div-idend decreases are more rapidly averaged out, as the opportunities from price declines are exploited by market participants.

Quarterly dividend and earnings announcements interaction

Considering that dividend announcement are often synchronized with earnings an-nouncements, we next, isolate possible dividend effects from earnings effect. Following Aharony and Swary (1980) methodology, each of unexpected dividend change is related to earnings announcements: (a) cases in which earnings announcement precede divi-dend announcements, and, (b) cases in which earnings announcement follow dividivi-dend announcements, by at least eleven trading days. The sample data frequency is presented in Table 2.7. The sample includes 1,507 dividends that follow (Panel A) and 542 that precede (Panel B) quarterly earnings announcements. 1,934 dividend announcements are not possible to associate with earnings announcements.

Table 2.7: Frequency of dividend announcements relative to earnings announcements

Panel A. Earnings announcements precede dividend announcements

Number of trading days between announcements dates Category 0-10 11-20 21-40 41-60 61+ Total (11-61+) Dividend decrease 36 17 32 48 10 107 No dividend change 284 72 176 244 46 538 Dividend increase 246 63 127 97 9 296 Panel B. Earnings announcements follow dividend announcements

Dividend decrease 14 9 7 2 0 18 No dividend change 82 39 69 21 28 157 Dividend increase 78 61 101 21 10 193 Note: This Table presents the number of observations according to the direction of dividend changes from one quarter to another, following the naive model, and by the number of trading days between earnings and dividend announcement dates in any given quarter. For 1,934 dividend declared it was not possible to identify quarterly earnings announcements.

In Table 2.7, Column "0-10" of Panel A and B represent 740 dividend and earnings announcements that are made on range of twenty one trading days, which we considered

close enough to be simultaneous (see Aharony & Swary, 1980). Among these are 50 de-creases, 324 inde-creases, and 366 cases of no change in dividends. Panel A also reports that 57.2% of quarterly dividend that are announced following earnings remain unchanged. For dividends announcements that precede earnings announcements the prevalence is in-crease, 52.4% of the cases. Decrease dividend announcements are avoid in both scenario. In view of the distribution present in Table 2.7, we analyzed in Table 2.8 the aver-age abnormal returns (AAR) and cumulative returns (CARs) realized by investors, in the ten days surrounding dividend announcements date, in response to dividend changes at least eleven trading days preceding or following the earnings announcement in the same quarter.

Table 2.8: Performance measures for days surrounding dividend announcement dates

Panel A. Average Abnormal Returns AAR

No Change Dividend Decrease Dividend Increase Event day EPS Precede EPS Follow EPS Precede EPS Follow EPS Precede EPS Follow -5 0.091 0.360* 0.122 0.034 -0.237** 0.124 (1.05) (1.68) (0.60) (0.10) (-1.95) (0.85) -4 0.125 0.349* -0.014 0.935** -0.056 0.008 (1.40) (1.81) (-0.05) (2.40) (-0.40) (0.05) -3 0.017 0.252 0.117 1.564* 0.094 -0.042 (0.20) (1.37) (0.65) (1.80) (0.30) (-0.25) -2 0.190** -0.145 0.090 0.732 0.013 0.101 (2.10) (-0.86) (0.40) (1.35) (0.10) (0.65) -1 0.191** -0.128 0.316* 1.710 0.211* 0.148 (2.40) (-0.65) (1.75) (1.20) (1.70) (0.80) 0 0.125 0.198 0.302 1.397 0.446** 0.262 (1.60) (1.11) (1.30) (1.45) (2.45) (1.60) 1 0.250*** 0.353* 0.018 1.592 0.177 0.567*** (3.15) (1.92) (0.10) (1.30) (1.05) (2.80) 2 0.202*** 0.171 0.003 0.937 0.317*** -0.097 (2.65) (1.02) (0.00) (1.45) (2.65) (-0.70) 3 0.127* 0.266 0.230 2.433 0.194 -0.018 (1.80) (1.62) (1.10) (1.25) (1.55) (-0.15) 4 0.162* -0.263 -0.209 -0.769 0.046 0.191 (1.90) (-1.55) (-1.00) (-0.95) (0.35) (1.30) 5 0.037 -0.041 0.411* 0.657 0.181 0.286* (0.45) (-0.27) (2.00) (0.60) (1.50) (1.95) Panel B. Average Cumulative Abnormal Returns (CARs)

No Change Dividend Decrease Dividend Increase EPS Precede EPS Follow EPS Precede EPS Follow EPS Precede EPS Follow CAR (-1,+1) 0.5655*** 0.424 0.636 4.698 0.834*** 0.977***

4.25 1.1 1.55 1.35 2.85 3.2 CAR (0,+1) 0.375 *** .552 * 0.3205 2.989 0.623** 0.828***

3.3 1.85 0.95 1.4 2.35 2.9 Note: This table provides the average abnormal return from the market model-adjusted for days surrounding the quarterly dividend announcement date, t=0. Using unexpected dividend change, the sample data are divided into three subsets: no change, decrease, and, increase in dividend. Further, each subset is separated according: cases in which earnings announcement precede dividend announcements, and cases in which earnings announcement follow dividend announcements (by at least eleven trading days).t-statistics are reported in parentheses and indi-cate if AR and CARs are different from zero. ***, **, and * indiindi-cate significance at the 1, 5, and 10% levels respectively.

Results in Table 2.8 indicate that in general stockholders earned, on average, only normal returns over the eleven days surrounding the announcement dates. Most of the ARs do not differ significantly from zero. This results suggest that the previous ARs observed on Table 2.6 might be effect of the information provided by quarterly earnings announcement that is disclosure with dividend and it has been excluded in this results.

Most of the statistically significant abnormal returns occurred on the day before the announcement day (t=0) and the two following days (+2). Specifically, companies that did not change dividend preceding earnings announcement observed abnormal return on

the following to days after dividend announcement, 0.25 and 0.202 percent significant at 1% level, respectively. Stockholders of companies that announced increasing dividend realized, on average, positive abnormal return surrounding the event date. In cases in which earnings precede, market seems to anticipate the information by one day. Instead, when earnings follow dividend announcement, market present a delay on reaction.

In Panel B of Table 2.8 we observer positive and significantly, at 1 percent level, cumulative abnormal returns for no change in dividend announcement precede earnings and for increasing dividend that whether precede or follow earnings. Notice that the CARs for dividend increase is almost two times compared to no change in dividends, the values for dividend increase range from 0.623% to 0.977% compared to 0.375% to 0.565% for unchanged dividends.

These findings of capital market reaction to dividend announcement provide a small support to the information content of the dividend hypothesis. The results show that the market reaction to dividend announcements is more significant when is following earn-ings announcements, which suggest that changes in quarterly dividends may provide a confirmatory information of previous earnings announcements. Furthermore, the low magnitude of abnormal return to dividend announcements also indicated that the infor-mation conveyed by dividend may be influenced by the minimum mandatory rule, once firms may be only anticipating the annual mandatory dividend. In this sense, we include minimum mandatory threshold to analyze the hypothesis that dividend announcements contain useful information beyond that mandatory rule.

2.5

Information content of annual dividend

announce-ments

The share price reaction to annual dividend surprise announcements is reported in Table 2.9. Panel A show the average abnormal return for the event period (T-5 to T+5)

around the dividend announcement. Panel B present the cumulative abnormal returns (CARs) for two event windows, namely (T−1,T+1) and (T0,T+1). The first column shows

the results for the entire sample and in columns two to four all announcements are classi-fied into three groups according the dividend forecast surprise: bad news, good news and no news. The t-statistics are reported in parentheses.

Table 2.9: Average abnormal returns and average cumulative abnormal returns for the event around annual dividend announcements

Panel A. Average Abnormal Returns (AAR) around dividend announcement date

Event day All events DivSurprisei,t< 0 DivSurprisei,t> 0 DivSurprisei,t= 0

-5 0.0315 0.086 -0.065 -0.004 (0.55) (1.00) (-0.3) (-0.05) -4 0.1295 ** 0.124 0.377* 0.09 (2.1) (1.5) (1.9) (0.9) -3 0.052 0.125 0.05 -0.018 (0.9) (1.5) (0.3) (-0.2) -2 -0.0725 -0.036 0.25 -0.167** (-1.3) (-0.45) (1.4) (-2) -1 0.0395 0.083 -0.252 0.051 (0.65) (1.00) (-1.45) (0.55) 0 -0.115 -0.098 0.351* -0.216* (-1.55) (-0.9) (1.75) (-1.9) 1 -0.0375 0.1 0.099 -0.197* (-0.5) (0.95) (0.4) (-1.85) 2 -0.0045 0.139 0.2425 -0.189* (-0.05) (1.55) (1.25) (-1.9) 3 0.0105 0.113 -0.0895 -0.071 (0.2) (1.35) (-0.5) (-0.8) 4 -0.0635 0.043 -0.2225 -0.14 (-1.1) (0.55) 9-1.15) (-1.6) 5 0.116 ** 0.171** 0.291 ** 0.031 (2.15) (2.15) (2.00) (0.4)

Panel B. Average Cumulative Abnormal Returns (CARs)

Event window All events DivSurprisei,t< 0 DivSurprisei,t> 0 DivSurprisei,t= 0

CAR (-1,+1) -0.113 0.085 0.198 -0.362** (-0.95) (0.45) (0.55) (-2.00) CAR (0,+1) -0.1525 0.002 0.45 -0.413***

( -1.45) (0 ) (1.45) (-2.7) Note: Panel A presents the average abnormal return for the event period (T−5, T+5) around the

annual dividend announcement. Panel B show the average cumulative abnormal returns for two event windows. The first column (all events) presents the results for the entire sample of 1,560 announcements, while the second, third and fourth columns present the estimated abnormal returns for the negative dividend surprise, positive and no surprise clusters, respectively. t-statistics are reported in parentheses and indicate if abnormal return is different from zero, and ***, **, and * indicate significance at the 1, 5, and 10% levels, respectively, using a two-tailed t-test.

Considering the event window of 11 days show in Panel A, the average abnormal returns are mostly insignificant and appear random. The results show a small positive

reaction on the dividend announcement day (day 0) of 0.351%, statistically significant at the 10% level, when dividend is higher than analyst forecast. But cumulative abnormal returns are not significantly different from zero when dividend surprise is positive in both three or two-day windows. When dividend announcement is equal to analyst forecast, the market witnesses a decreasing stock price reaction on the day of the event and the following two days. The average CARs are -0.362% (t=-2.00) and -0.413 (t=-2.70) during the event windows of (-1,+1) and (0,+1), respectively. However, the results are not in line with those found in the US and other markets (e.g. Al-Yahyaee et al., 2011; Andres et al., 2013; Bozos et al., 2011; Lang & Litzenberger, 1989; Pettit, 1972). Therefore, hypothesis H1 suggest that minimum dividend limited the information that the firms send to the market by announcing dividend distribution.

In Table 2.10, it is re-examined the market reaction to dividend announcements by splitting the dividend announcements according to dividend surprise based on analyst ex-pectation and them subdivide using the minimum dividend require by law. The results evidence that there is a tendency of negative surprise be also lower than minimum manda-tory, as well as positive surprise be related to dividend higher than minimum request, and no surprise to the minimum. However, the results does not make clear that the analyst consider the mandatory amount into the forecast.

Table 2.10 shows that most ARs are not different than zero, so there are no clear di-rection of the market response on dividend announcement date, except when dividend is higher than minimum request. Specifically, when dividend surprise is negative but higher than mandatory, we observe average abnormal return negative (-1.025%, t=-2.70). When dividend surprise is positive and higher than minimum request, AR is 0.527% (t=2.050). The results follow Vancin and Procianoy (2016) conclusion of only dividend higher than minimum mandatory represents a real decision of managers, which should sign infor-mation to market. A possible explanation for market not react to dividend announcement

T able 2.10: A v erage abnormal returns and av erage cumulati v e abnormal returns for the ev ent around annual di vidend announcements usi ng the minimum required by la w N AR t-statistics W ilcoxon test CAR − 1 ,+ 1 t-statistics W ilcoxon test CAR 0 ,+ 1 t-statistics W ilcoxon test Di vSurprise_i,t<0 Lo wer than minimum mandatory 401 -0.126 -1.000 -1.389 0.136 0.6 0.052 0.014 0.05 -0.858 Equal to minimum mandatory 243 0.189 0.850 0.760 0.198 0.600 0.096 0.180 0.600 0.149 Higher than minimum mandatory 63 -1.025*** -2.700 -2.533 -0.679 -1.300 -1.390 -0.765** -1.700 -1.739 Di vSurprise_i,t>0 Lo wer than minimum mandatory 26 0.631 1.550 1.283 0.234 0.350 0.419 0.428 0.750 0.724 Equal to minimum mandatory 24 -0.539 1.100 -1.343 0.370 0.500 -0.6 0.168 0.300 -0.371 Higher than minimum mandatory 80 0.527** 2.050 1.765 0.135 0.250 0.120 0.542 1.250 0.892 Di vSurprise_i,t = 0 Lo wer than minimum mandatory 103 -0.086 -0.350 0.392 -0.275 -0.750 -0.605 -0.465 -1.500 -1.513 Equal to minimum mandatory 459 -0.256 -1.550 -0.675 -0.394 -1.600 -1.590 -0.457** -2.150 -1.635 Higher than minimum mandatory 161 -0.185 -1.100 -0.948 -0.327 -1.050 -1.110 -0.253 0.950 -1.267 Note: The T able presents the av erage abnormal return on the announcement date and the av erage cumulati v e abnormal returns for tw o ev ent windo ws, CAR − 1 ,+ 1 and CAR 0 ,+ 1 . The announcements are classified into three groups follo wing di vidend surprise, and then subdi vides using minimum di vidend required by la w . W e report t-statistics and W ilcoxon signed rank test statistics, and indicate if abnormal return are dif ferent from zero. ***, **, and * indicate significance at the 1, 5, and 10% le v els, respecti v ely , usi ng a tw o-tailed test.

lower than mandatory is due the pre-approval decision of lower dividend in general annual meting which might be released information previous.

Looking at the speed of the share price adjustment to the new information emanat-ing from dividend announcements, the results in Table 2.10 show the CARs of three days event window do not provide any evidence of price adjustment around the dividend announcement event. Looking at the post-announcement period (CAR0,1), we observe

market reaction to negative dividend surprise higher than minimum and when dividend represents no surprise and is equal to minimum mandatory. These findings show that the annual dividend surprises are not emitting a clear useful signal to the market. Hence, the result suggest the information content of dividend is affected by the minimum mandatory rule of each country.

2.5.1

Concurrent earnings and dividend announcements

Another feature, is that annual dividend are announced at the same time as annual earnings. It is included the earnings surprise as a control variable to disentangle the im-pact of the two signals, dividend and earnings, and to examine the interaction among them. Earnings surprise is given by EPSSur prisei,t = (Ei,t− FEi,t)/Pi,−10, where Ei,t is

actual reported earnings and FEi,t is the average earnings per share forecast for year t

published prior to the actual earnings announcement and Pi,−10is the stock price 10 days

before the announcement date. Actual earnings per share are obtained from COMPUS-TAT Global and forecast earnings are from the I/B/E/S database. Earnings and dividend are noisy signal, so investors evaluate the consistency of these two measures when they announced simultaneously. Hence, larger stock market reactions are observed when earn-ings and dividend surprises occur in the same direction as compared to when they change in different direction (e.g., G. Chen et al., 2002; Conroy et al., 2000; Michayluk et al., 2017). However, when considering mandatory dividend rule, all profitable firms are force to pay dividends, without forcing unprofitable firms. Thus, market reaction to dividend