(a) Market reacts positively to dividend increases and negatively dividend decreases. Three
explanations are provided for this notion.
- Information content (signalling) hypothesis,
- Free cash flow hypothesis
iii. Clientele effect
Discuss these hypotheses related to dividend policy.
(b) Briefly discuss five reasons for companies to choose repurchases rather dividends under a
classical tax system.
(c) Identify (interim or final) dividend change using “dividend history from the DatAnalysis
Premium Database” for the company allocated to you for the assignment 2.
A dividend change is defined as the relative difference from the previous year’s level.
- Interim dividend change = interim dividend per share in year t minus interim dividend per share in
- Final dividend change = Final dividend per share in year t minus Final dividend per share in year
Announcement date for the dividend change can be identified from “ASX announcements from the
DatAnalysis Premium Database”.
- Announcement date for interim dividend change: use the announcement date of half yearly
- Announcement date for final dividend change: use the announcement date of preliminary final
- Select “ASX announcements”
- select “Search option – Click here to refine your search by ASX Announcement Type
and/or text search”
- for Announcement Type: select periodic reports
- for Sub-Announcement Type: select preliminary – final statement for final dividend; half
yearly report interim dividend change
- specify the date rage
(i) Calculate three day return earned by your firm for the period from the day before the
announcement continuing through the day after the announcement date; and two day return earned
by your firm for the period from the day of the announcement to the day after the announcement
(ii) Calculate the market return for the corresponding periods in (i).
(iii) Calculate the excess: (i) – (ii)
Check the results for any other two students in your tutorial class and report that result in your
Discuss the relevant theory with the findings in Step 3 and Step 4.
(30 + 30 + 40 = 100 marks)