How Do Prices React to the Dividend Announcement? Conventional vs Islamic Stock Markets in Indonesia

This research is an event study, aiming at observing the stock markets' reaction to dividend announcements using the abnormal return indicator. This study covers a four-year period, from 2019 to 2022. The event window is set as three-day before and three-day after the dividend announcement. A number of 50 companies were selected as the sample of the study consists of each 25 Islamic stocks and 25 conventional stocks. The research employs a documentation method, primarily sourcing data from the official website of the Indonesia Stock Exchange, by collecting daily closing stock prices during the observation period. The study's findings revealed the presence of abnormal return differences both before and after the dividend announcement, for both Shariah-compliant and conventional company stocks. The findings further signify that the different stock market reactions as indicated by the differences in the abnormal returns to the dividend announcements.

I. Introduction

A dividend announcement is a corporate action made by a corporation to determine the distribution of profits to investors. This announcement triggers a market reaction that is reflected in stock price changes around the dividend announcement period. Investors consider a company's corporate actions as a factor when making investment decisions. This is done to attain rational analytical results and invest in the right stocks. Investors will weigh the size of dividends distributed by the company each year. Companies that announce dividends higher than the previous years may attract more investor interest and cause the stock price of the respective company to rise around the announcement date. The price difference caused by stock price changes on the announcement date results in abnormal returns.