Event-related GARCH: the impact of stock dividends in Turkey

Cash dividends and rights issues on the Istanbul Stock Exchange are commonly accompanied by large stock dividend payments. This paper tests the proposition that stock dividends have no effect on company value, using a novel GARCH process with event-related intercept terms to capture induced changes in the volatility of stock prices. Returns rise in advance of stock dividend payments, but this effect becomes statistically insignificant when proper allowance is made for heteroscedasticity. Volatility rises after stock dividend payments, and this is attributed to persistence following exceptionally large price movements around the ex-dividend day, rather than to any transitory rise in the unconditional returns variance. The study does document some irrationality in responses to cash dividends, with prices rising/falling after increased/decreased dividend payments, rather than after the much earlier dividend announcements.

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