Homework Assignment #5 (Due April 3, 2015) Efficient Market Hypothesis The objective of this homework is to investigate if the release of accounting information provides information to the marketplace. More precisely, the goal is to study the information content of dividend announcements. The study focuses on the quarterly dividend announcements for 20 firms of the manufacturing industry, listed in the New York Stock Exchange, over the five-year period from January 2009 to December 2013. The five years of data for 20 firms provide a total sample of 400 announcements. In the excel file, you will find three types of information about these announcements: the NYSE index and firm’s daily stock prices, the date of the dividend announcements, and the dividend per share (DPS) announced on that date. 1. To study the impact of such information release on the equity value of the firm, it is essential to make a link between the information release and change in the value of equity. The idea is that, if dividend disclosures have information content, one would expect the announcement impact on the market’s valuation of the firm’s equity to depend on the magnitude of the unexpected component of the announcement. Thus a measure of the deviation of the actual announced dividend from the market’s prior expectation is required. For constructing such measure, we use an AR(1) model to get the forecast of DPS as a proxy for the market’s expectation of DPS. More precisely, for each firm you run this model and then categorize each announcement to one of the three groups: (1) good news if DPSt > 1.04 E(DPSt), (2) no news if 0.96 E(DPSt) < DPSt > 1.04 E(DPSt), and (3) bad news if DPSt < 0.96 E(DPSt). 2. Now we need to identify the rolling estimation window, event day, and event window. The event day corresponds to the announcement day and we call it day zero. The event window includes 20