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...Their performance, however, was not consistent over time and the highest returns were obtained during final years. Empirical findings based on the analysis of different types of portfolios demonstrate the importance of dividends as source of significant fundamental information items from stock market companies. At the same time, they show that a dividend investment strategy for the Polish stock market is most successful when the selection of stocks for the dividend yield growth portfolios is subject to further restrictions, most notably concerning company size.
Keywords Dividend yield growth * Emerging market * Investment strategy * Portfolio analysis * Stock market
JEL Classification G15
Introduction
In every financial market dividends are one of the most carefully watched and scrupulously analyzed types of corporate data. From an investment perspective dividend strategies have been attracting the attention of stock market participants as well as financial researchers and academic authors.
Existing financial literature presents rich empirical evidence about the profitability of dividend-driven trading strategies from many well established markets (Aharony and Swary 1980; Charest 1978; Filbeck and Visscher 1997; Kothari and Shanken 1997; Petit 1972; Visscher and Filbeck 2003). However, little is known about the role of dividends in the new emerging stock markets, especially those in Central and Eastern European countries.
This study deals with the stock market in Poland. In the last decade the Polish capital market has been subject to many substantial changes concerning its size, its role in the economy, the participation of foreign and domestic investors, taxation, etc. As a result, the Warsaw Stock Exchange (WSE) now ranks as a mid-sized European stock exchange and is one of the two largest in the Central and Eastern Europe. (1)
The Polish market is particularly interesting for the investigation of dividend strategies because it is relatively new and there is little research on either dividends or investors' behavior in response to the release of new information contained in the dividends. Existing studies have focused mainly on the dividend policy of Polish companies and the factors influencing that policy (Duraj 2002; Sierpinska 1999), rather than on dividends as predictors of future stock market returns (Brzeszczynski and Gajdka 2005, 2006; Wypych 2004). One of the most important reasons is that equity is a new investment opportunity that did not exist in Poland before the 1990s.
The analysis in this paper contributes to the existing finance literature about dividends and dividend yield growth effects by providing evidence about the profitability of dividend yield growth strategies using data from the emerging Polish stock market. The empirical results obtained may be used for comparisons with the findings for other markets and may contribute to the formulation of more general conclusions about the informational role of dividends based on the evidence from this new, emerging economy.
The paper is organized as follows. A discussion of dividend models and strategies is presented in the second section, the research methodology is described in the third section, empirical results are reported in the fourth section, and conclusions are summarized in the last section.
Dividend Models and Strategies
Despite many economic changes in the last few decades, most corporations still face the same dividend issues, as those originally described by Lintner (1956) in the mid-1950s. Dividend policy was one of the first areas of corporate finance which was analyzed with sophisticated financial models and it has been one of the problems most often researched by leading financial experts. Yet, still much remains unexplained about the effect that cash dividends have on shareholders' wealth and other issues concerning company operations.
The financial literature recognizes several dividend models which are sometimes divided into two general groups: the agency costs models and the signaling models (Megginson 1997). Agency cost models assume that dividend payments can be analyzed as an attempt to overcome agency problems that arise when corporate ownership and control become separated. These problems are particularly significant in large, slow growing companies that generate large quantities of free cash flow. In such firms the managers have many incentives to spend this cash flow rather than pay it out to shareholders. According to these models investors understand these incentives and pay a low price for a manager controlled firm that does not distribute its free cash flow to shareholders. They are willing to pay higher prices for companies that pay higher dividends. That is why announcements of dividend initiation or increases are associated with stock price appreciation.
According to dividend signaling models, dividends are needed to convey positive information from well informed managers to badly informed investors. Because it is a costly form of communicating information, only good companies can afford to pay dividends, and the most profitable ones, with the best prospects, will pay out the highest dividends.
The literature documents substantial empirical evidence supporting the existence of a dividend signaling effect and points out two equally important aspects of this phenomenon.
First, dividend announcements are related to future earnings of listed companies and are believed to be good predictors of their future financial performance. There is evidence that the analysis of dividend value and its change over time may provide useful information about the company's financial standing and its ability to generate cash flow in the future (Bhattacharya 1979; DeAngelo et al. 1996, 2000; Gonedes 1978; John and Williams 1985; Miller and Rock 1985; Watts 1973; Williams 1988).
Second, there is evidence that information about dividends, in particular about changes in dividends, has a direct relationship with future stock market returns. The first studies documenting this effect were conducted by Aharony and Swary (1980), Brickley (1983), Charest (1978), Kwan (1981) and Petit (1972), and they were later extended by Ambarish et al. (1987),...
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