How do stock markets react to dividend announcements during the COVID-19 pandemic? Evidence from the GCC markets

Abstract

Purpose

This study aims to investigate how stock markets responded to corporate dividend policy changes during the COVID-19 pandemic in the Gulf Cooperation Council (GCC) countries. Likewise, it explores how efficiently market prices incorporate the news by examining the speed of stock price adjustment to various dividend announcements.

Design/methodology/approach

The sample includes 741 dividend announcements from 2017 to 2021 made by 326 firms listed in the stock markets of the GCC countries. A series of regression analyses examine how dividend announcements influence the market reaction during the COVID-19 pandemic, controlling for other well-documented firm characteristics.

Findings

This study reveals an adverse stock price reaction to all the dividend announcements in most GCC markets. The findings also show strong asymmetric effects of COVID-19 on how the markets react to different dividend changes. Likewise, the authors show that investors tend to underreact to the good news of dividend increases amid hard times of crises due to prevailing uncertainty and bearish sentiment. Besides, regression results reveal that firms with dividend reductions during the pandemic experience less adverse market reactions than dividend-decreasing firms prepandemic.

Practical implications

For firms, the findings confirm the role that corporate dividend policy can play in conveying signals to investors, especially during hard times of crises and turbulences, thereby affecting their share price. For policymakers, the results substantially affect market efficiency and firm valuation in the GCC markets.

Originality/value

This study is not only one of the first few attempts to scrutinize how the pandemic has affected the market reaction to changes in corporate dividend policies but also, to the best of the authors’ knowledge, it is the first to examine how corporate dividend policy could affect stock markets during COVID-19 in the context of GCC markets.

Citation

Al-Khasawneh, J.A., Ali, H. and Hassanein, A. (2024), "How do stock markets react to dividend announcements during the COVID-19 pandemic? Evidence from the GCC markets", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 17 No. 4, pp. 746-769. https://doi.org/10.1108/IMEFM-08-2023-0294