Dividend Changes and Security Prices

This paper analyzes the effect of unexpected dividend changes on the values of common stock, preferred stock, and bonds. Two potential effects are identified: a wealth transfer effect and a signalling effect. Previous studies have shown that positive (negative) dividend change announcements produce positive (negative) common stock price changes. Whereas these findings have been attributed to the signalling aspect of dividends, they are also consistent with the wealth transfer hypothesis. Based on the announcement day returns of common and preferred stock and bond holders, it is demonstrated that the primary factor influencing security returns in response to dividend changes is market signalling. A wealth transfer effect is not necessarily ruled out, but if it exists it is dominated by the signalling effect.     

Are Certain Dividend Increases Predictable? The Effect of Repeated Dividend Increases on Market Returns

The authors report the findings of their study of over 400 stocks of public companies that announced at least 20 consecutive increases in their dividends during the period 1999 and 2009. With the assumption that the stock market learns to anticipate future dividend increases from current patterns, the study was designed to answer the question: How many increases does it take for the market to anticipate, and “price in,” the pattern of dividend increases? The authors report finding that abnormal returns around the first and second announcements of dividend increases are significant and positive, but are much less significant for the third and further increases. They also find that the size of the dividend increases tends to fall with more increases, and that the largest percentage dividend changes occur early in the sequence.     

CHANGES IN MARKET PERCEPTION OF RISKINESS: THE CASE OF TOO-BIG-TO-FAIL

In 1984, the Comptroller of the Currency stated that the eleven largest banking firms were “too big to fail,” implying they would receive de facto 100 percent deposit insurance. The question is whether this announcement altered the market's perception of the riskiness of all banking organizations, not just those included in the Comptroller's statement. We address this question with two tests. First, through the examination of changes in institutional equity ownership from 1980 through 1988, we find that the announcement is associated with increases in institutional ownership at a time when a comparable set of nonfinancial firms saw reductions in institutional holdings. Second, through the examination of stock returns behavior of bank holding companies around announcements of dividend cuts and omissions from 1974 through 1991, we find that the Comptroller's 1984 announcement altered the market's reaction to dividend cuts and omissions by bank holding companies not specifically included in the Comptroller's statement.     

Investment performance of “environmentally-friendly” firms and their initial public offers and seasoned equity offers

We employ a sample of 748 environmentally-friendly (or “green”) firms listed on U.S. stock exchanges to extend studies of the effects of socially responsible investment (SRI) on stock investment returns and the performance of initial public offerings (IPOs) and seasoned equity offerings (SEOs). Our empirical tests document positive and statistically significant excess returns for our environmentally-friendly firms and their IPOs and SEOs, in contrast to our control IPO and SEO samples which underperform. In summary, a “green” equity premium is evident in returns calculated from a variety of benchmarks.     

The Cross‐Section of Credit Risk Premia and Equity Returns

We explore the link between a firm's stock returns and credit risk using a simple insight from structural models following Merton ( 1974 ): risk premia on equity and credit instruments are related because all claims on assets must earn the same compensation per unit of risk. Consistent with theory, we find that firms' stock returns increase with credit risk premia estimated from CDS spreads. Credit risk premia contain information not captured by physical or risk‐neutral default probabilities alone. This sheds new light on the “distress puzzle”—the lack of a positive relation between equity returns and default probabilities—reported in previous studies.     

Ceo Compensation And The Transformation Of Banking

We examine the compensation strategies of commercial bank holding companies (BHCs) during 1992–2000. In particular, we analyze whether CEO compensation is more closely tied to the presence of growth options and to risk than is revealed in earlier research. We also examine whether BHC entry into investment banking has influenced compensation policies. Our evidence shows a stronger link between growth options and CEO compensation in the 1990s than observed in earlier studies and that pay‐for‐performance sensitivities are substantially larger for BHCs that have entered the underwriting business. We also find that BHC leverage and variability in returns have positive effects on CEO incentive pay. Finally, we find some evidence supporting the hypothesis that pay‐for‐performance sensitivities decline generally at BHCs as return variability increases, as agency theory predicts.     

Dividend change announcements,ROE, and the cost of equity capital

We hypothesize and present strong evidence that dividend increases (decreases) result in a general decrease (increase) in the opportunity cost of equity capital (K_e), measured by the discount rate implicit in analysts' forecasts. Estimates of K_e obtained from analyst forecast data likely capture priced information risk that is not reflected in cost of equity capital estimates customarily obtained from empirical excess returns data. In the presence of a full menu of control variables, our measured changes in the cost of equity capital are shown to provide high explanatory power for the market reaction to dividend change announcements. We also hypothesize and demonstrate that the impact of dividend changes on the cost of equity is conditional on how preannouncement K_e relates to preannouncement return on equity (ROE). Specifically, dividend increases result in a reduction in the cost of equity capital only when currently experienced ROE < K_e. This is consistent with shareholders preferring earnings to be reinvested by managers to earn a higher rate than their opportunity rate. When ROE > K_e, on the other hand, the cost of equity capital actually increases. For dividend decreases, the cost of equity capital increases only when ROE > K_e, consistent with firms currently experiencing positive economic income using dividend cuts to signal anticipated permanent earnings declines. Together with extensive robustness tests, our results indicate that dividend changes significantly affect shareholder value, contrary to the longstanding dividend irrelevance argument.     

Dynamic relationships among equity flows,equity returns and dividends: Behavior of U.S. investors in China and India

This research examines the linkages among U.S. equity flows to China and India, their equity returns, and their fundamental variables. We find that positive shocks to U.S. equity flows to China and India elicit an insignificant response to returns. This finding provides evidence that U.S. institutional investors are not a destabilizing influence in these markets. However, positive innovations to dividends in both China and India have a negative impact on returns. We conjecture that the high potential growth rates in these markets make it preferable for companies to retain earnings rather than pay dividends. In India, shocks to dividend yields have a strong negative influence on U.S. equity flows. Our results validate the need to take into account fundamental variables when examining U.S. investor behavior in emerging equity markets.     

Do Changes in Dividends Signal the Future or the Past?

Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. We investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years ?1 and 0, but show no subsequent unexpected earnings growth. Also, the size of the dividend increase does not predict future earnings. Firms that cut dividends in year 0 have experienced a reduction in earnings in year 0 and in year ?1, but these firms go on to show significant increases in earnings in year 1. However, consistent with Lintner's model on dividend policy, firms that increase dividends are less likely than nonchanging firms to experience a drop in future earnings. Thus, their increase in concurrent earnings can be said to be somewhat “permanent.” In spite of the lack of future earnings growth, firms that increase dividends have significant (though modest) positive excess returns for the following three years.     

Are all dividends created equal? Australian evidence using dividend‐increase track records

Recent research indicates that the signal sent by a dividend change is more powerful for longer histories of unchanged dividends. We study the dividend history of Australian firms to investigate whether the signalling power of a dividend increase varies with the frequency of repetition. We find that the first three consecutive dividend increases are associated with significantly positive abnormal returns, and subsequent increases are generally not significant, even after controlling for the interaction effect with the simultaneously announced earnings information. Our results support the hypothesis that repeating a dividend increase eventually leads to a reputation for further increases and weakens the value of subsequent increases as a means of disseminating management's private information.     

What do dividend reductions signal?

Dividend reductions have long been considered a “last resort” action for firm managers. Managerial reluctance to reduce dividends emanates from the view that dividend drops signal managerial pessimism regarding future earnings. Contrary to expectations, studies show that earnings rebound significantly following a dividend reduction; yet investors react negatively to the dividend-drop announcement. We present an explanation for the anomalous behavior of earnings and returns around the time of a dividend drop. Our evidence suggests that a reduction in a firm's established dividend coincides with a decrease in the value of the firm's real options. Earnings rebound following the dividend reduction due to the savings that result as the firm allows growth options to expire; however, announcement period returns suggest that investors recognize the lost value associated with the forthcoming expiration of growth options.     

Revisiting corporate dividends and seasoned equity issues

Information signaling is regarded as an important motivating factor in corporate payout decisions, particularly with regard to cash dividends and the costly information signaling which they provide. Although Loderer and Mauer (1992) find little evidence to suggest that the announcements of firms’ equity offers are timed to arrive just after dividend declarations as a means of supporting the offer price. Using updated data, we determine that the dividend declaration does have a positive effect on the market reaction to equity offering announcements. We find that the abnormal returns from the announcement of seasoned equity offerings (SEOs) were −1.45 per cent for those SEO firms which had already made dividend declarations, whereas the returns for those SEO firms where the equity issue did not immediately follow a dividend declaration were −1.83 per cent. In this study, we interpret the changes in the impact of the dividend declaration on the equity offering announcement using the ‘tax regulation hypothesis’ and the ‘information asymmetry hypothesis’, and find that while our empirical results provide strong support for the latter, they provide only weak support for the former.     

Procyclicality of the comovement between dividend growth and consumption growth

Duffee (2005) shows that the amount of consumption risk (i.e., the conditional covariance between market returns and consumption growth) is procyclical. In light of this “Duffee Puzzle,” I empirically demonstrate that the conditional covariance between dividend growth (i.e., the immediate cash flow part of market returns) and consumption growth is (1) procyclical and (2) a consistent source of procyclicality in the puzzle. Moreover, I solve an external habit formation model that incorporates realistic joint dynamics of dividend growth and consumption growth. The procyclical dividend-consumption comovement entails two new procyclical terms in the amount of consumption risk via cash flow and valuation channels, respectively. These two procyclical terms play an important role in generating a realistic magnitude of consumption risk. In contrast to extant habit formation models, the conditional equity premium no longer increases monotonically when a negative consumption shock arrives because it might lower the amount of risk while increasing the price of risk.     

Capital Structure and the Ex‐Dividend Day Return

We apply an option‐pricing framework to the ex‐dividend behavior of common stocks. The framework explains the observed behavior of positive returns on the ex‐dividend day and predicts that ex‐dividend day returns will be higher for firms with greater financial leverage. Empirical testing supports the prediction. In contrast to prior studies, we find that dividend‐capture activity has no significant impact on ex‐dividend behavior, and we offer an explanation based on the importance of tick intervals.     

Dividend Consistency: Rewards,Learning, and Expectations

The fact that many companies have a long track record of consistent dividend increases suggests that managers believe there is some benefit to establishing and maintaining such a pattern. Many companies, for example, follow a perennial policy of increasing the dividend in a particular quarter, maintaining it at the same level for the next three quarters, and then increasing it in the same quarter of the following year. But does the capital market reward companies for maintaining a consistent dividend policy? Do companies with a history of repeated dividend increases earn long‐term positive abnormal returns; and if so, how long do the returns persist? The authors find that companies earned significantly positive abnormal returns following each of the first five annual dividend increases, over and above the positive announcement‐month returns. Nevertheless, the reward decreases as the track record of dividend increases becomes longer. After the first dividend increase, companies enjoy significantly positive returns for the next two years. Companies that increase the dividend in the same quarter of the following year also enjoy significant positive returns, but returns that are smaller (and less statistically significant) than in the case of first‐time dividend increases. And as the dividend‐increase track record further lengthens, the size and statistical significance of the abnormal returns continues to shrink; and after the sixth dividend increase, the abnormal returns in the next twelve months are statistically indistinguishable from zero. In sum, although there is some support for maintaining a consistent dividend policy, the market response diminishes over time, and investors do not earn abnormal returns by buying stocks whose annual dividend has already been increased six or more times.     

EVIDENCE OF A RELATION BETWEEN STOCK PRICE REACTIONS AROUND CASH DIVIDEND CHANGES AND YIELDS

Here, the relation between stock price reactions to announced dividend changes and the yields of the underlying securities is examined. A significant positive (negative) relationship is detected between announcement date returns and yield for dividend increases (decreases) even after controlling for the magnitude of the dividend change. Price reactions associated with dividend increases vary directly with the change in yield and, on average, low-yielding companies do not experience abnormal returns when they increase their dividends. Implied in these results is that the information conveyed through dividend changes varies with the yield of the underlying security and the market response is a function of factors beyond the pure information effect.     

Accounting Ratios and the Cross‐section of Expected Stock Returns

Under clean‐surplus accounting, the log return on a stock can be decomposed into a linear function of the contemporaneous log return on equity, the contemporaneous log dividend–price ratio (if the stock pays a dividend), and both the contemporaneous and lagged values of the log book‐to‐market equity ratio. This paper studies the implications of this decomposition for the cross‐section of conditional expected stock returns. The empirical analysis reveals that the log accounting ratios capture cross‐sectional variation in both the conditional mean and conditional variance of log stock returns, which is consistent with the decomposition. It also brings fresh insights to the relation between firm size (market equity) and conditional expected stock returns. The evidence indicates that the conditional median return increases with firm size, while the conditional return skewness decreases with firm size. Empirically, the skewness effect outweighs the median effect, leading to the well‐documented inverse relation between size and average returns. The results of out‐of‐sample tests suggest that investors could use the information provided by the observed values of the log accounting ratios to formulate more effective portfolio strategies.     

半强制股利政策与股权融资成本

在一些国家,强制股利支付是改善公司治理和弥补法律保护不足的重要手段,我国自2001年起陆续出台了类似的半强制股利系列政策。然而现有部分研究却发现,半强制股利政策可能会产生监管“悖论”。那么,事实是否如此？以往这些研究主要从监管成本角度来分析,可能忽视了监管带来的收益,我们认为虽然半强制股利政策提高了融资门槛,但也可能实现股东之间的利益共享,并有利于投资者形成稳定的股利预期,从而实现治理的“溢价”。本文利用2008年监管政策提供的良好自然实验机会,主要从半强制股利政策的治理效应角度来评估政策产生的经济后果。研究发现,从总体平均意义上看,半强制股利政策有助于降低受影响公司的股权融资成本。进一步研究发现,在代理成本高的公司,半强制股利政策的治理作用更为明显,存在一定的治理“溢价”。当然,半强制股利政策也存在一定的局限性,在公司的信息披露质量差和外部融资约束较大的公司,半强制股利政策的治理效应被削弱。     

The valuation of projects under the dividend imputation tax system

This paper proves that a modified weighted average cost of capital (“WACC”) valuation methodology is a rigorous and practicable method of valuing projects and companies under the Australian dividend imputation tax system. This methodology uses an effective tax rate in calculating both the discount rate and the ungeared after tax cash flow. A cash flow after effective corporate tax is shown to be equivalent to a cash plus value of imputation credit stream. Importantly, this valuation methodology is applicable to returns that are non-uniform and of finite duration. Also examined is the discounting of equity returns at the company's cost of equity capital. A worked example is presented to clarify and quantify the effects discussed.     

The valuation effects of stock splits and stock dividends

This study presents evidence which indicates that stock prices, on average, react positively to stock dividend and stock split announcements that are uncontaminated by other contemporaneous firm-specific announcements. In addition, it documents significantly positive excess returns on and around the ex-dates of stock dividends and splits. Both announcement and ex-date returns were found to be larger for stock dividends than for stock splits. While the announcement returns cannot be explained by forecasts of imminent increases in cash dividends, the paper offers several signalling based explanations for them. These are consistent with a cross-sectional analysis of the announcement period returns.