Abstract

This paper presents a study of 157 dividend announcements made by 40 companies listed in the Bahrain Bourse and an examination of the relationship between dividend announcements and the stock market. The study lasted from 2004 to 2013, and the results indicate that investors have gained cumulative abnormal returns that average at 2.29 percent within the 30-day periods before and after the dividend announcement. Moreover, the findings have revealed that investors gained approximately 0.45 percent of the market value on all stocks that had increasing dividends; therefore, it can be reasonably concluded that, when announced to the public, dividend increases promote a positive message about a company’s future growth and the promise of sustained cash flow. Alternatively, it could be seen as the Bahrain Bourse is inefficient in a semi-strong form. The study further highlights that abnormal returns gained by investors tend to vary across sectors. In general, the findings of this study fail to provide significant evidence in support of the dividends irrelevancy theory; on the contrary, they indicate that dividend payments act as positive signals that assure investors of steady cash flow and substantial future earnings.

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