Test for 'underreaction' to stock dividend Announcements at NSE

Abstract

The paper sought to test for existence of underreaction anomaly at NSE using a company self-selected event, the stock dividend announcements. Underreaction anomaly refers to the tendency of stock prices to continue reacting to important announcements in the days following the announcement date. A sample of21 stock dividend announcement events at NSE covering a 7-year period from 1st January 1999 to 31st December 2005 were tested using comparison period return approach (Cl'Ra.). A continuation of positive returns in the days following the stock dividends announcement date was observed for the majority of the announcements. A test for stability of the results over time showed that no single year was driving the results. This observation provides evidence consistent with existence ofunderreaction to stock dividend announcements at NSE.