Dividend Puzzle on Bulgarian Stock Exchange - Opportunity for an Abnormal Risk-adjusted Returns
The present paper examines the gap between the leading theoretical formulations about the optimal dividend policy and empirical data on the companies and investor’s behaviour known in the academic literature as “dividend puzzle”. The existence of this phenomenon and its impact on share prices are ex...
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irk-123456789-876322015-10-23T03:02:11Z Dividend Puzzle on Bulgarian Stock Exchange - Opportunity for an Abnormal Risk-adjusted Returns Pavlov, Ts.L. Finance The present paper examines the gap between the leading theoretical formulations about the optimal dividend policy and empirical data on the companies and investor’s behaviour known in the academic literature as “dividend puzzle”. The existence of this phenomenon and its impact on share prices are explored. The aim of the study is to establish whether it is possible risk-adapted high-yield to be realized through dividend investing. Empirical results show that the yield on the actively or passively managed portfolio of high-dividend-yield shares outperforms the main index of Bulgarian Stock Exchange -Sofia. Стаття досліджує розрив між теоретичними формулюваннями просування політики оптимізації дивіденду і емпіричними даними компаній і пове- дінкою інвестора, відомій в академічній літературі як "головоломка дивіденду". Досліджено існування цього явища і його вплив на загальні ціни. Мета вивчення - встановити чи є можливим пристосува-ти високоприбутковість для усвідомлення розра- хунку дивіденду. Емпіричні результати показують, що прибуток на активно або пасивно управляємий портфель високодохідних акцій покращує головний індекс Болгарської фондової біржі. Статья исследует разрыв между теоретическими формулировками политики оптимизации дивиденда и эмпирическими даннными компаний и поведеним инвестора, известный в академичнеской литературе как "головоломка дивиденда". Исследовано существование этого явления и его влияние на общие цены. Цель изучения - установить возможность приспособления высокоприбыльности для понимания расчета дивиденда. Эмпирические результаты показывают, что прибыль на активно либо пасивно управляемый портфель высокодоходных акций улучшает главный индекс Болгарской фондовой биржи. 2014 Article Dividend Puzzle on Bulgarian Stock Exchange - Opportunity for an Abnormal Risk-adjusted Returns / Ts.L. Pavlov. // Економічний вісник Донбасу. — 2014. — № 4(38). — С. 121-125. — Бібліогр.: 38 назв. — англ. 1817-3772 http://dspace.nbuv.gov.ua/handle/123456789/87632 en Економічний вісник Донбасу Інститут економіки промисловості НАН України |
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Finance Finance Pavlov, Ts.L. Dividend Puzzle on Bulgarian Stock Exchange - Opportunity for an Abnormal Risk-adjusted Returns Економічний вісник Донбасу |
| description |
The present paper examines the gap between the leading theoretical formulations about the optimal dividend policy and empirical data on the companies and investor’s behaviour known in the academic literature as “dividend puzzle”. The existence of this phenomenon and its impact on share prices are explored. The aim of the study is to establish whether it is possible risk-adapted high-yield to be realized through dividend investing. Empirical results show that the yield on the actively or passively managed portfolio of high-dividend-yield shares outperforms the main index of Bulgarian Stock Exchange -Sofia. |
| format |
Article |
| author |
Pavlov, Ts.L. |
| author_facet |
Pavlov, Ts.L. |
| author_sort |
Pavlov, Ts.L. |
| title |
Dividend Puzzle on Bulgarian Stock Exchange - Opportunity for an Abnormal Risk-adjusted Returns |
| title_short |
Dividend Puzzle on Bulgarian Stock Exchange - Opportunity for an Abnormal Risk-adjusted Returns |
| title_full |
Dividend Puzzle on Bulgarian Stock Exchange - Opportunity for an Abnormal Risk-adjusted Returns |
| title_fullStr |
Dividend Puzzle on Bulgarian Stock Exchange - Opportunity for an Abnormal Risk-adjusted Returns |
| title_full_unstemmed |
Dividend Puzzle on Bulgarian Stock Exchange - Opportunity for an Abnormal Risk-adjusted Returns |
| title_sort |
dividend puzzle on bulgarian stock exchange - opportunity for an abnormal risk-adjusted returns |
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Інститут економіки промисловості НАН України |
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2014 |
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Finance |
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| citation_txt |
Dividend Puzzle on Bulgarian Stock Exchange - Opportunity for an Abnormal Risk-adjusted Returns / Ts.L. Pavlov. // Економічний вісник Донбасу. — 2014. — № 4(38). — С. 121-125. — Бібліогр.: 38 назв. — англ. |
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2025-07-06T15:17:13Z |
| _version_ |
1836911200600850432 |
| fulltext |
Ts. L. Pavlov
121
Економічний вісник Донбасу № 4(38), 2014
UDC 336.76 (497.2)
Ts. L. Pavlov,
“D. A. Tsenov” Academy of Economics, Bulgaria
DIVIDEND PUZZLE ON BULGARIAN STOCK EXCHANGE –
OPPORTUNITY FOR АN ABNORMAL RISK-ADJUSTED RETURNS
1. Introduction1
The dividend policy is one of the most conten-
tious and controversial areas of corporate finances.2 In
parallel with the creation of fundamental theoretical
framework on the problem in the 60s of the last centu-
ry with the researches of Gordon (1959), Lintner
(1956, 1962), Miller и Modigliani (1961) the debate
“why the companies pay cash dividends and why in-
vestors have strong preferences to them” also started.
Black (1976) analysed the situation and defined it as
“dividend puzzle” because he failed to find convincing
and rational arguments for deviations in theoretical
assumptions. His conclusion remains valid to a large
extent today: “The harder we look at the dividend pic-
ture, the more it seems like a puzzle, with pieces that
just don’t fit together” [1976, p.5].
The essence of the puzzle is related to the fact that
in conditions of perfect markets capital gain and divi-
dend should be considered as perfect substitutes for
each other. The reason of this is that after the distribu-
tion of dividends the price of a share should be reduced
by the amount of the dividend. Thus, investors should
be indifferent to the dividend policy. When investors
need money they can create dividends or so called
“homemade cash dividend” by selling part of the
shares held. On this basis, it is surprising the strict
dividend policy followed by most companies (Brav et
al., 2005), and the attachment of investors to cash divi-
dends (Loomis, 1968), provided that the dividend poli-
cy neither creates nor destroys shareholders’ wealth.
The dividend puzzle is complicated additionally if
taxes and transaction costs are added to the analysis. In
many countries, including the Republic of Bulgaria,
dividend yields are taxed more heavily than capital
gains. Also, taxes on realised capital gains are due only
when the whole or part of the position is closed. In this
situation, the investors may prefer companies which do
not distribute their gains or have low dividend yield.
This should encourage companies, which cannot invest
in projects with more than required yield from share-
holders, to buy their own shares instead of paying divi-
dends. However, transaction costs on the implementa-
tion of the sale/purchase of shares on the stock ex-
1 Email: cpavlov@uni-svishtov.bg
2 For more details on the issue of dividend policy
see. Аdamov, V. Firm Finances. Abagar, 2006, p. 363-
388. Interrelationship between dividend policy and capital
structure of a firm in Bulgarian condition is studied in
Adamov, V., Zahariev, A. Corporate Capital Manage-
ment, Abagar Publishing, 2012.
change should be taken into account. In general, they
are significantly lower than the difference in the taxa-
tion of investors and they are a cheaper option for
companies compared to expenses related to the divi-
dend payment. It should not be neglected the fact that
in the need of capital, repurchased shares may be sold
on the market. Such a procedure is associated with
significantly lower costs of issuing new securities
(shares or debt).
This article focuses on the impact of the dividend
puzzle on the yield of shares and possibilities for real-
ising of abnormal returns (high-dividend-yield).
Among the first authors who study the importance of
dividend yield and share yield are Rosenberg and
Marathe (1979), and Litzenberger and Ramaswamy
(1979, 1982). The results of their studies have shown
that high-dividend-yield stocks realise higher return
than low-dividend-yield stocks. Later Fama and French
(1988) and Hodrick, (1992) have found that dividend
yield is a good predictor of subsequent return. On this
basis, it is not surprising the investment interest in
strategies based on selection of shares which have a
high dividend yield.
2. Approaches for explanation of dividend puz-
zle and the performance of dividend yield strategies
In more general terms, the availability of dividend
puzzle and the impact of dividend yield on the yield of
shares should be classified as a breach of market effi-
ciency hypothesis (Fama, 1970). This anomaly may be
related to other empirically established regularities
such as value (P/E, P/B ratio) effect (Basu, 1977; Fama
and French, 1992), small firm effect (Banz, 1981) and
market overreaction (De Bondt and Thaler, 1985;
Jegadeesh and Titman 1993). The combination of high
dividend yield, high P/E (P/B) ratio, lower risk than
‘the market’ and higher earnings sustainability, sug-
gests good results from implication of dividend yield
strategies (Clemens, 2012). However, it also suggests
the need of parallel (or at least indirect) linking of
those anomalies in terms of theoretical interpretation of
dividend puzzle.
The leading rational approaches for the explana-
tion of dividend puzzle are related to agency costs of
firm’s holding excess cash (Borges, 2009) and infor-
mational considerations (Bhattacharya, 1979 and
Hakansson, 1982).
As a whole, the agency costs reflect conflicts of
interest between managers and shareholders in firms,
arising from the division between ownership and con-
trol of most public companies. Managers are appointed
in firms in order to protect the interests of sharehold-
Ts. L. Pavlov
122
Економічний вісник Донбасу № 4(38), 2014
ers, but in practice these managers are hard to be con-
trolled (especially by minority shareholders) due to the
lack of complete information about what is happening
in the company. As for the dividend policy, the main
problem is related to management of cash reserves. If
companies accumulate large cash reserves, it is possi-
ble for managers to take (consciously or unconscious-
ly) actions which are not of shareholders’ interest. The
most obvious problem is connected with maintaining
of high levels of cash and cash equivalents which gen-
erally have a much lower yield than the cost of capital
of the firm. Unfortunately, in the search for a solution
to this problem, managers often tend to take quite ex-
pensive for shareholders ventures such as buying luxu-
ry goods, supporting inefficient units (subsidiaries),
investment in projects with negative NPV or currently
observed takeovers of companies which consequently
are overstated. In this regard, it is logical that investors
want companies to pay cash dividends up to the
amount of capital which is not used for initiatives that
increase shareholders’ wealth.
The second rational approach is focused on the
importance of dividend announcement as a signal for
future development of the company. The increase in
dividends should be related to improved prospects for
future gains but it can also mean a lack of investment
opportunities for the company. Maintaining regular
dividends should mean that the company is under con-
trol, while in taking a decision for dividend reduction it
is expected a decline in future cash flows. In fact,
there is a lack of consensus among researches about the
signals of changes in dividends and convincing evi-
dences of long-term relationship between them and the
levels of future yields. But it is also a fact that the an-
nouncements of changes in the amount of dividends
reflect on share prices in the proportional relationship
(Aharony and Swary, 1980).
These approaches are unable to give an explana-
tion for the so called “clientele effect” and they fail to
explain why investors are willing to pay a premium for
companies with higher dividend yield. Also these ap-
proaches do not affect the essence of the other associ-
ated anomalies. In this connection, the approaches
dealing with dividend puzzle and falling within the
scope of behavioural finance1 are of interest for the
study. These approaches were developed by Shefrin
and Statman in 1984 and took into account the influ-
ence of the two theories of choice behaviour – the theo-
ry of self-control и prospect theory.
1 Behavioural finance integrates knowledge about
the specifics of human behaviour (psychology and sociol-
ogy) in financial matters and models in order to explain
the investors’ actual behaviour and capital markets. For
more details see. Pavlov, Ts. Critical Analysis of the
Development of Behavioural Finance. Annual Almanac.
Scientific Researches of Ph.D. Students in D. A. Tsenov
Academy of Economics – Svishtov. №8 Tsenov Publish-
ing House, 2014, p. 427-443.
The leading motive in both theories of choice be-
haviour is that investors do not regard capital gains and
dividends as perfect substitutes for each other. Accord-
ing to the theory of self-control (Thaler and Shefrin,
1981, 1983) the deviations from the investors’ rational
behaviour are due to their inability to delay gratifica-
tion because of a lack of self-control. The reflection of
this dependence is observed in various spheres of life
from the inability to stop unhealthy habits to simulta-
neously maintenance of children’s deposits and taking
consumer credits at negative interest spread. Particular
to the analysed problem, investors prefer dividends
because dividends provide a balance between the cur-
rent and future consumption without the necessity of
self-control to maintain this balance. If it is necessary
to sell shares for current consumption (homemade cash
dividend), willingness and self-control will be needed
in order to not normally be consumed investment port-
folio, thereby to distort investment objectives.
The application of the prospect theory (Kahneman
and Tversky, 1979) to the analysis of dividend puzzle
significantly contributes to clarify its essence. The
theory examines the regularities in the investors’ be-
haviour when making decisions in an uncertain envi-
ronment. These regularities have an impact on the dis-
cussed problem in the following directions:
1) investors evaluate the usefulness in terms of
potential gains and losses, making the dividend very
attractive and yielding high prospect utility due to their
distribution;
2) losses are assessed much more heavier than
gains which is consistent with the empirical data show-
ing that reductions in dividends have a greater impact
on market assessments than their increase;
3) investors assess gains and losses from a given
reference point, which changes over time, together
with changes in dividends.
Thus in simultaneously payment of extraordinary
and regular dividend, in the next period at the return to
the value of regular dividend, investors regard this
dividend as a loss. According to the prospect theory
there is an additional difference between dividends and
capital gains related to the need in the homemade cash
dividend investors to take independent financial deci-
sions for which results they feel personally responsibil-
ity. For example, if an investor sold shares to buy a
commodity and then the share price increased highly,
the investor would feel regret for the decision. But if in
the same situation the company paid a cash dividend
(with the same value), the representative investor
would not feel such discomfort.
By modelling the specific characteristics of hu-
man behaviour and especially by the prospect theory,
most market anomalies (Barberis et al., 1998) and puz-
zles (Barberis et al., 2001) are resolved. These anoma-
lies and puzzles together with those examined here
mean that the reason for their existence is mostly psy-
chological. On this basis it is not surprising the con-
Ts. L. Pavlov
123
Економічний вісник Донбасу № 4(38), 2014
stancy in results of dividend yield strategies and hence
their popularity in practice.
3. Research methodology
Testing of the Bulgarian capital market for the
presence of dividend puzzle will be done by examining
the possibility of realisation of excess yield based on
dividend yield strategies. To achieve this goal, active
and passive portfolio strategies will be used.
The active strategy is realised in three steps:
(1) based on the last price on the year and allocat-
ed annual dividend of shares listed on BSE-Sofia, ten
companies with the highest dividend yield are selected;
(2) an investment portfolio with equal weights (an
equal amount is invested in each share) is drawn up
with these ten issues;
(3) the procedure is repeated at the beginning of
each year.
As for the other strategy there is no rebalancing
and the portfolio is composed at the beginning of the
sample of companies which regularly pay dividends
during the period of the study1. Again, the assets in-
cluded in the portfolio are with equal weights.
The yield of both portfolios is calculated on an
annual basis by equation (1):
1
1 1
,
N
it it it it it
pt
i it
P P D I S
R
P
−
= −
− + + +
= (1)
where
pR is the return on the portfolio at year t; itP –
closing price of share i at year t; 1itP − – closing price of
share i at year t-1; itD – distributed dividend of the
security i at year t; itI – realised interest rate of rein-
vestment of dividends received (because investors can
reinvest at different percentages, itI is set to zero);
itS – the value of shares received from the increase of
capital with reserves (stock split).
Establishing whether any realised higher return
from dividend portfolios is not due to the rational com-
pensation for risk is a critical moment in the study. In
this respect it is necessary to derive risk-adjusted re-
turns. This will be done through the widely used model
of Jensen (1968), in which risk-adjusted abnormal
returns are available when 0>a :
( ) ,pt f p mt f ptR R a R Rβ ε− = + − + (2)
where:
1 Due to the specifics of the Bulgarian capital mar-
ket, under regular payments of dividend it must be con-
sidered of the total excerpt (14 years), in maximum two
inconsecutive years there can be gaps in the distribution
of dividends.
pR is the annual yield of the researched portfolio;
fR – the risk-free rate; a – the abnormal risk-adjusted
return; pβ – the estimated systematic risk of the port-
folio; mtR – annual market return; random deviation at
time t.
4. Data Sources
For the realisation of the research, the market re-
turn must be put. The index SOFIX is seen as the per-
sonification of the market among the Bulgarian in-
vestment community. The index’s calculation started at
2000 which determined the temporal sampling interval
from 2000 to 2014. The values of SOFIX and the pric-
es of the individual shares are extracted from the inves-
tor.bg and money.bg database (at split of the shares
from an issue). The information about distributed divi-
dends is received from money.bg and bse-sofia.bg.
The value of distributed dividends to SOFIX are
derived on the basis of the structure of the index over
the years and weighing the distributed dividends, ac-
cording to the methodology for calculating the index –
according to the free-float of the individual issues and
the corresponding weight factor. Then the resulted
values are converted into points for comparability in
the calculation of market returns.
For risk-free yield ( )fR it is used a cumulative
annual return of the Bulgarian quarterly government
securities. The data source is minfin.bg.
In the selection of emissions, the preferred shares
and companies that have paid less than two dividends
during the period of the study are excluded.
Shares corresponding to the established criteria
for inclusion in the passive portfolio are ten: 6AB
(BSE code), 5ALB, 4F6, 5SR, 5MH, 57B, 52E, 55B
(up to 2012 incl.), 4HE, 5MA.
5. Empirical Results
The obtained results are summarized in Table 1.
The active and passive investment strategies, based on
dividend yield, have been proven as extremely success-
ful in the Bulgarian capital market. The regression
equations and their parameters (α и β) are statistically
significant at confidence interval of 95%. Positive
values of α in both portfolios indicate the possibility of
realisation of an impressive abnormal risk-adjusted
return which exceeds 30%.
The portfolios have low systematic risk compared
to SOFIX although they include a smaller number of
companies, i.e. they have a weaker diversification. An
important feature of portfolios is that they have fewer
years with a negative yield, and also have twice higher
ratio return / risk than SOFIX.
The difference between the average geometric an-
nual yield of active and passive portfolios is only
3.59%. Such a premium cannot be regarded as com-
Ts. L. Pavlov
124
Економічний вісник Донбасу № 4(38), 2014
pensation for the management of such an actively man-
aged portfolio because this premium is commensurate
with the potential transaction costs and bid-ask
spreads. Of course, at a passive management there is a
higher risk of ownership of companies in financial
distress. Therefore it is necessary for two consecutive
years of undistributed dividends, the position to be
removed from the portfolio and possibly to be replaced
by another.
Table 1
Risk and return characteristics of the active and
passive dividend portfolio for the period 2001- 2014
Portfolio
Year SOFIX
Active
portfolio
Passive
portfolio
2001 14.06% 41.8% 25.4%
2002 69.12% 47.8% 56.9%
2003 154.16% 76.2% 86.9%
2004 39.39% 215.2% 164.0%
2005 33.87% 71.7% 72.4%
2006 50.15% 70.6% 77.0%
2007 45.72% 153.5% 167.3%
2008 -79.35% -67.9% -72.4%
2009 19.39% 39.4% 28.5%
2010 -14.35% 28.7% 44.5%
2011 -9.68% 6.6% 2.3%
2012 12.53% 31.4% 15.0%
2013 49.02% 38.9% 35.1%
2014 9.66% 26.1% 31.8%
Geometric return 14.93% 40.93% 37.34%
Annualized volatility 51.59% 65.98% 61.67%
Return / Risk 28.95% 62.03% 60.55%
Jensen's Alpha -- 35.78% 31.17%
Beta 1 0.68 0.73
6. Conclusion
Based on the analysis and the empirical results
displayed, the conclusions are:
First: There is a dividend puzzle on the Bulgarian
capital market and the dividend yield of the shares has
a strong influence on their return.
Second: Through the use of basic and easy to ap-
ply in investment practice dividend yield strategies it
can be realised high risk-adjusted excess returns on a
consistent basis on the Bulgarian Stock Exchange –
Sofia. For the individual investors, the application of
passive investment is preferred, given the low transac-
tion costs and the lack of efforts to maintain the portfo-
lio.
Third: Currently, the specifics of human behav-
iour are the most plausible explanation for the availa-
bility of dividend puzzle and consistency of the results
from the application of dividend yield strategies.
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Павлов Ц.Л.. Головоломка дивіденду на
Болгарській Фондовій Біржі – можливість для
анормальних ризиків та скорегованих повер-
нень.
Стаття досліджує розрив між теоретичними
формулюваннями просування політики оптимізації
дивіденду і емпіричними даними компаній і пове-
дінкою інвестора, відомій в академічній літературі
як "головоломка дивіденду". Досліджено існування
цього явища і його вплив на загальні ціни. Мета
вивчення – встановити чи є можливим пристосува-
ти високоприбутковість для усвідомлення розра-
хунку дивіденду. Емпіричні результати показують,
що прибуток на активно або пасивно управляємий
портфель високодохідних акцій покращує головний
індекс Болгарської фондової біржі.
Ключові слова: головоломка дивіденду, полі-
тика дивіденду, вкладення дивіденду, ринкова ефе-
ктивність, теорія перспективи, ринки капіталу.
Павлов Ц.Л. Головоломка дивиденда на
Болгарской Фондовой Бирже – возможность для
аnнормальных рисков и скорректированных
возвратов.
Статья исследует разрыв между теоретиче-
скими формулировками политики оптимизации
дивиденда и эмпирическими даннными компаний и
поведеним инвестора, известный в академичнеской
литературе как "головоломка дивиденда". Исследо-
вано существование этого явления и его влияние на
общие цены. Цель изучения – установить возмож-
ность приспособления высокоприбыльности для
понимания расчета дивиденда. Эмпирические ре-
зультаты показывают, что прибыль на активно
либо пасивно управляемый портфель высокодохо-
дных акций улучшает главный индекс Болгарской
фондовой биржи.
Ключевые слова: головоломка дивиденда, по-
литика дивиденда, вложение дивиденда, рыночная
эффективность, теория перспективы, рынки капи-
тала.
Pavlov. Ts. L. Dividend Puzzle ON Bulgarian
Stock Exchange – Opportunity for аn Abnormal
Risk-adjusted Returns
The present paper examines the gap between the
leading theoretical formulations about the optimal
dividend policy and empirical data on the companies
and investor’s behaviour known in the academic litera-
ture as “dividend puzzle”. The existence of this phe-
nomenon and its impact on share prices are explored.
The aim of the study is to establish whether it is possi-
ble risk-adapted high-yield to be realized through divi-
dend investing. Empirical results show that the yield on
the actively or passively managed portfolio of high-
dividend-yield shares outperforms the main index of
Bulgarian Stock Exchange –Sofia.
Keywords: dividend puzzle, dividend policy, divi-
dend investing, market efficiency, prospect theory,
capital markets
JEL: G10, G14
Received by the editors: 27.11.2014
and final form 23.12.2014
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