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

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WORKING PAPERS SERIES WP02-02 Event-related GARCH: the impact of stock dividends in Turkey Roy Batchelor and Ismail Orgakcioglu Event-related GARCH: the impact of stock dividends in Turkey by Roy Batchelor and Ismail Orakcioglu City University Business School, London Abstract: 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. Keywords: Event Study; GARCH; Share Prices. Mailing Address: Professor Roy Batchelor, City University Business School, Frobisher Crescent, Barbican, London EC2Y 8HB, UK. Email: [email protected] 1 1 I. INTRODUCTION This study examines the behaviour of the prices of leading shares traded on the Istanbul Stock Exchange (ISE) in the weeks before and after the payment of stock dividends. We apply an event study methodology using pooled cross-sectional and time series data, with the novel twist that price movements through the event window are assumed to follow a mixture of GARCH processes. This allows us to measure and test the significance of stock dividends for both the level and volatil

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