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: r.a.batchelor@city.ac.uk
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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 volatility of
share prices, and to control for the effects of the simultaneous payment of cash div