This study focuses on the announcement effect of both dividend and corporate earnings on stock prices to examine evidence of semi-strong form efficiency in Malaysian Stock Exchange. A sample of 120 companies listed on the Main Board of Bursa Malaysia that announced the final dividends in their fourth financial quarter was selected covering a time period from January 1, 2006 to November 30, 2006. The study results support the information content of dividend theory that increasing dividend announcements, on an average, earn positive abnormal return, while decreasing dividend announcements are associated with negative abnormal return. Based on the market reaction to both dividend and earnings announcements, this study concludes that both dividends and earnings play a significant role as signaling effects of the future prospects of the firm, with the dividends effect proving to be significantly stronger than the earnings effect. The results provide some evidence of semi-strong form efficiency in the Malaysian stock market, where stock prices adjust in an efficient manner to dividend and earnings announcements.

Efficient Market Hypothesis (EMH), also called theory of stock market behavior, has inspired a new dimension of research in behavioral finance in the last two-and-a-half decades. Within a short period of time, EMH has emerged as the cornerstone of modern-day finance theory, dominating the mainstream of finance research. Thus, empirical testing of EMH has been conducted overwhelmingly in a variety of ways, utilizing data from different countries, across different time periods and using different event studies. Considering the three forms of capital market efficiency, semi-strong form efficiency implies that stock prices are not only reflective of past historical information, but also of all publicly available information on the market. In testing this, Fama (1970) argues that each individual test on semi-strong form efficiency only brings supporting evidence for the model, with the idea that by accumulating such evidence, the validity of the model will be established.

Dividend and earnings announcements are among the two most important signaling devices used by managers to transmit information about firms' future prospects to the public (Lonie et al., 1996). If dividend and earnings news does convey useful information in an efficient capital market, then it is assumed that such news will be reflected in the stock price as soon as they are publicly released in the market. Dividend and earning news is taken by investors as "signals which are emitted by the managers of companies in an uncertain economic environment characterized by informational asymmetry" (Lonie et al., 1996). Isa and Subramaniam (1992) suggested that companies' dividend policies are important; and that decreasing dividends or eliminating planned or unplanned dividend payouts—all together in certain periods signal that a firm is financially distressed. Other general market evidence on corporate event announcement information indicates that when a company announces a major change or unexpected future dividend payments omissions, the immediate market reaction can be sudden and dramatic. In Malaysia, the companies usually announce both earnings and dividends on the same day. For this reason, we examine both the dividend and earnings announcements simultaneously in this study.

Applied Finance Journal, Malaysian Stock Exchange, Efficient Market Hypothesis, Capital Markets, Malaysian Stock Market, New York Stock Exchange, Malaysian Capital Markets, Economic Knowledge, Negative Market Reactions, Malaysian Investors, Investment Opportunities.