The Differences Between Stock Splits and Stock Dividends: Evidence on the Retained Earnings Hypothesis

Abstract:  This paper investigates stock dividends and stock splits on the Copenhagen Stock Exchange (CSE), which is of interest because several of the more recent explanations for a stock market reaction can be ruled out. The main findings are that the announcement effect of stock dividends as well as stock splits is closely related to changes in a firm's payout policy, but that the relationship differs for the two types of events. A stock dividend implies an increase in nominal share capital and hence a decrease in retained earnings. Firms announcing stock dividends finance growth entirely by debt (explaining the need for an increase in nominal share capital) and retained earnings. Basically all firms announcing a stock dividend with a split factor of less than two can also afford to increase their total cash dividends permanently, at least proportionally to the increase in share capital, leading to a significant announcement effect of 4.23%. Firms announcing a stock dividend with a split factor of two or more also increase total cash dividends permanently, but less than proportionally to the increase in share capital. This leads to an insignificant announcement effect of 0.08%. These findings support a retained earnings/signaling hypothesis. For stock splits, no separate announcement effect was found when a firm's payout policy was controlled for. This lends support to the idea that a stock split per se is a cosmetic event on the CSE and is also consistent with the fact that making a stock split on the CSE is virtually cost free.     

Odd‐lot Costs and Taxation Influences on Stock Dividend Ex‐dates

Abstract:   Past research has revealed significant abnormal ex‐date returns for stock dividends even though the ex‐date is known in advance and the distribution contains no new information. Various researchers have suggested that the higher transaction cost of selling odd‐lot share parcels compared to round‐lot share parcels is a key driver in the abnormal returns. However, no study to date has directly compared the ex‐date price reaction of stock dividends distributed when odd‐lot transaction costs were charged to those issued when odd‐lot costs were not evident. As odd‐lot trade costs were eliminated from the New Zealand Stock Exchange on 1 October, 1991, the New Zealand market provides a unique opportunity to directly test the role, if any, that odd‐lot transactions costs have in explaining stock dividend ex‐date returns. We find that prior to October 1991 stock dividend ex‐dates exhibit significantly positive returns, however, we do not find any significant ex‐date return once the higher odd‐lot transaction costs were removed. The New Zealand market also enables us to examine an imputation tax based argument of the ex‐date price reaction and we find evidence that imputation tax credits have a value greater than zero.     

不同收益水平上盈余信息与股利政策的交互关系研究

以沪深上市公司为样本,检验盈余信息和股利政策在不同收益上的解释作用,并深入研究盈余信息分别与现金股利、股票股利和多种分配方案等三个层面的股利政策的交互关系。结果表明:在大多数收益水平上,盈余信息和股利政策显著影响市场收益水平,而且二者之间存在显著的交互关系。具体而言,现金股利变化与盈余变化在不同收益水平上具有不同的交互影响;而股票股利与盈余信息的交互影响在各收益水平上均不十分突出;多种分配方案中的"综合政策"与盈余变动在各收益水平上表现出较大的正向交互影响。     

THE RELATION AMONG DIVIDEND POLICY,FIRM SIZE,AND THE INFORMATION CONTENT OF EARNINGS ANNOUNCEMENTS

In this paper we investigate the role of dividends in explaining the size effect. The previous literature concludes that before the firm's earnings announcement, small firm stock prices impound less information than large firm stock prices. This size effect is evidenced by the greater market reaction to small firm earnings announcements than to large firm earnings announcements. We find that if the dividend announcement precedes the earnings announcement, no size effect exists. The implication is that the information conveyed by dividend announcements includes the information conveyed to investors in large firms by other information sources. However, if the firm does not pay dividends or if the firm's earnings announcement precedes its dividend announcement, the size effect exists. The implication is that dividends do not completely explain the size effect. That is, there are information sources other than dividends that are exclusively available to investors in large firms, and the information provided by these sources is reflected in the stock price of large firms before the earnings announcement.     

Stock dividends in China: signalling or liquidity explanations?

We test alternative hypotheses on a sample of Chinese stock dividends. The inverse Mills ratio, a signal about future performance, is positively related to announcement returns but does not predict higher future performance. Analysts do not revise their earnings forecasts after the announcement date. Our results are more consistent with liquidity‐based theories. We find that managers choose higher stock dividend ratios if share prices deviate more from the industry‐wide average. Increases in proportional spreads, depth, and the number of trades and decreases in average trade size, and price impact suggest greater participation of liquidity and small investors following stock dividends.     

The Market Value of UK Dividends From Shares With Differing Entitlements

Abstract:   This paper determines the market value of dividends in the UK during periods before and after 1997. Previous studies, which use the ex‐dividend day method, tend to provide noisy and potentially biased measures of dividend value. We estimate the value of dividends from the prices of shares that are identical except for their dividend entitlements, and are traded concurrently (within the same hour). We argue that our estimates of dividend value are the cleanest yet available for the UK. Our evidence suggests that ex‐dividend day estimates are biased downwards, but that this bias may be mitigated by the use of robust regression. Dividend values are heterogeneous and are not explained by the tax‐clientele hypothesis.     

Dividend Policies and Price-Volume Reactions to Cash Dividends on the Stock Market: Evidence from the Istanbul Stock Exchange

This study examines the effects of cash dividend payments on stock returns and trading volumes in the stock market. It also investigates whether there is any difference in the investment behavior of investors with respect to the dividend pay out ratio and size in the Istanbul Stock Exchange (ISE)from 1995 to 2003. Prices start to rise a few sessions before cash dividend payments, and on the ex-dividend day, they fall less than do dividend payments, finally decreasing in the sessions following the payment. Trading volume shows a considerable upward shift before the payment date and, interestingly, is stable after Thus, cash dividends influence prices and trading volumes in different ways before, at, and after payment, providing some profitable active trading strategy opportunities around the ex-dividend day. The findings support price-volume reaction discussions on the divident payment date and the significant effect of cash dividends on the stock market.     

Effects of early bond refundings: An empirical investigation of security returns

This paper examines bond-for-bond refundings and their effects on stock returns. Refundings can affect the reported income, cash flows (including taxes), dividend constraints and financial ratios of firms. For a sample of 36 NYSE and ASE firms that performed refundings between 1971 and 1980, stock returns were significantly higher than predicted (only) around the release of the quarterly earnings announcement that included the refunding's effects. While the refundings were found to have many characteristics that were hypothesized to benefit shareholders, only the change in earnings per share was found to be associated with the prediction errors. Further, there appears to be no refunding-related information released in the quarterly earnings announcement, except for the refunding gain. These results imply that a portfolio of refunding firms can be created in advance of the quarterly earnings announcement that will generate abnormal returns around the earnings announcement. Because trading rules are inconsistent with the concept of an efficient capital market, these results constitute an anomaly.     

The intraday speed of adjustment of stock prices to earnings and dividend announcements

This paper examines the effects of Broad Tape news releases of earnings and dividend announcements on three aspects of intraday stock price behavior: mean returns, return variance, and serial correlation in consecutive price changes. The initial price reaction is evident in the first pair of price changes following the release (i.e., within a few minutes, at most). The returns earned by simple trading rules dissipate within five to ten minutes, although significant returns are detected in the overnight period and at the opening of trading on the next day. Disturbances in the variance and serial correlation persist for several hours and extend into the following trading day. As a class, dividend announcements induce much less activity than do earnings, although the response to dividend changes is comparable to the earnings announcement effect.     

AN ANALYSIS OF SHAREHOLDER REACTION TO DIVIDEND CUTS AND OMISSIONS

In this paper the proposition is tested that stock market reaction to a dividend change is a function of its information content. A multiple regression model is formulated to identify the factors that contribute significantly to the capital loss suffered by shareholders when firms decide to cut/omit dividends. Results indicate that, in conformity with the information content hypothesis, the announcement period capital loss induced by a dividend deduction significantly depends on the percentage change in dividends, the size and risk of the firm, and the price performance of the firm's stock in the immediately preceding period. The results further reveal that (1) simultaneous announcements of poor earnings cause larger capital losses; (2) prior announcements of loss/lower earnings, strikes, etc. attenuate the negative impact of dividend cuts; (3) managerial reassurances that the dividend reduction is growth-motivated produces a weakly favorable effect, and (4) institution of stock dividends concurrently with the dividend cut significantly reduces the negative valuation effect. It is concluded from the evidence that stock market reaction to managerial signals is a function of the perceived costs associated with these signals.     

Dividends and share repurchases during the COVID-19 economic crisis

In this article, we examine dividends and share repurchases of S&P 1500 firms during the COVID-19 crisis characterized by the stock market crash and a relatively quick stock price recovery propelled by technology stocks. We find that the great majority of firms either maintain or increase the level of dividends during the crisis period. Yet, the relation between the dividend payout and reported earnings is negative and significant. This relation also holds for other types of payouts, including share repurchases and special dividends. Moreover, we find that both forecasted and realized earnings of up to 1 year into the future are negatively associated with current dividends, implying that existing payout policies are unsustainable in the longer term. Surprisingly, the difference-in-differences test shows that firms strongly affected by the COVID-19 crisis have higher dividend payouts (relative to net earnings) compared to unaffected firms. The same test indicates that strongly affected firms significantly reduce repurchases.     

A Test of the Relative Pricing Effects of Dividends and Earnings: Evidence from Simultaneous Announcements in Japan

We study the pricing effects of dividend and earnings announcements by taking advantage of the unique setting in Japan where managers simultaneously announce the current year's dividends and earnings as well as forecasts of next year's dividends and earnings. Defining surprises as deviations from analysts' forecasts, we find that share price reactions are significantly affected by earnings surprises, especially management forecasts of next year's earnings. The information content of dividends is marginal and is restricted to announcements of next year's dividends. Consistent with Modigliani and Miller's dividend irrelevance proposition, current dividend surprises have no material impact on stock prices in Japan.     

Operating performance following dividend decreases and omissions

Using quarterly data and benchmarks based on past performance characteristics, I find little evidence that earnings change following 661 dividend decreases and 484 dividend omissions between 1980 and 1998. The exception is that earnings deteriorate during the quarter of dividend omissions, but they recover within a couple of quarters. My results further suggest that the lack of a more pronounced earnings decline is neither attributable to a contemporaneous and confounding increase in share repurchases, to earnings management, nor to improving investment opportunities, and the results are similar for firms that are not predicted to cut dividend payouts based on their financial flexibility. Instead, I find some evidence that the negative stock price reaction reflects the dismal performance during the quarter of the announcement, especially for firms that omit dividends, and that the market interprets the dividend announcements too pessimistically.     

A note on transaction costs and the interpretation of dividend drop‐off ratios

In a recent edition of this Journal, Bartholdy and Brown (1999) presented an analysis of the ex‐dividend share price behaviour of shares listed on the New Zealand Stock Exchange. The authors conclude that their results are consistent with the tax clientele effect (driven by long‐term investors) and that there is little or no support for the short‐term trading hypothesis. Our purpose is to highlight the importance of transaction costs in analyses such as Bartholdy and Brown's. We argue that their results have an alternative interpretation because their analysis excludes the impact of transaction costs. We extend their model to include transaction costs and show that their results are not necessarily inconsistent with the short‐term trading hypothesis. A critical point of our analysis is that, in the presence of transaction costs, the equilibrium drop‐off ratio for dividend strip traders will be less than one, and, in some cases, can be less than the equilibrium drop‐off ratio for long‐term investors.     

The Chinese Stock Dividend Puzzle

In this paper, we examine the announcement effects of dividends with an emphasis on stock dividends in China's capital market. We find that dividend-paying stocks exhibit significantly positive abnormal returns while non-dividend-paying stocks show a negative announcement effect. Further, we document that the cumulative abnormal returns for pure stock dividends and combined dividends are the main drivers of this announcement effect. In contrast, pure cash dividend stocks experience no significant price run-up before announcement. The significant announcement effect of stock dividends is robust to controlling the earnings surprise effect. We offer some discussion of the possible explanations.     

Relationship Between Analyst Forecast Properties and Equity Bid‐Ask Spreads and Depths Around Quarterly Earnings Announcements

Abstract:   We study the relationships between three variables which proxy for the ex‐ante level of information asymmetry – forecast dispersion, forecast revision volatility, and the level of analyst coverage, and equity bid‐ask spread and depth changes around quarterly earnings releases. Kim and Verrecchia (1994) suggest that earnings releases increase the level of information asymmetry and lower the level of liquidity in the security market. Using both an OLS regression framework and a simultaneous equations model, we examine whether equity bid‐ask spreads increase and depths decrease as the level of information asymmetry increases. Our results indicate that spreads are higher (relative to a non‐event period) around earnings announcements when information asymmetry is more pronounced; however, depths are lower only on the day following the announcement when there is greater information asymmetry. Relative spreads have a significant positive relation with both forecast dispersion and revision volatility and a significant negative relation with analyst coverage. Relative depths have a significant negative relation with forecast dispersion and a significant positive relation with analyst coverage. Our findings indicate that the equity specialist adjusts both spreads and depths when confronting informed traders around earnings releases and that these adjustments are more pronounced when the level of information asymmetry is greater.     

Options and earnings announcements: an empirical study of volatility, trading volume, open interest and liquidity

In this paper we study the impact of earnings announcements on implied volatility, trading volume, open interest and spreads in the stock options market. We find that implied volatility increases before announcement days and drops afterwards. Also option trading volume is higher around announcement days. During the days before the announcement open interest tends to increase, while it returns to regular levels afterwards. Changes in the quoted spread largely respond to higher trading volume and changes in implied volatility. The effective spread increases on the event day and on the first two days following the earnings announcement.     

Earnings Response Coefficients and Dividend Policy Parameters

In a seminal paper. Ball and Brown (1968) documented a positive statistical association between earnings surprises and stock returns around an earnings announcement. They concluded that accounting earnings conveyed ‘useful’ information to the market. However, the question of how accounting earnings convey useful information is still being understood. Recent work on this topic has found that current accounting earnings aid investors and analysts in predicting future accounting earnings. Few studies, however, have examined the usefulness of current earnings for predicting other value-relevant attributes. A model by Ohlson (1989a) suggests that investors are also interested in the relationship between current earnings and future dividends. Ohlson's model is supported by empirical tests in this paper which show that the relationship between current earnings and future dividends is significant in explaining cross-sectional variation in earnings response coefficients (ERCs). A second result of interest is that information in dividends substitutes for that in accounting earnings. We find that dividend policy parameters reflect information contained in current earnings. These results add new insights on the information revealed through the analysis of ERCs. Consistent with logic presented here, a symmetrically opposite result is found with respect to dividend response coefficients. The informativeness of earnings (dividends) is found to be negatively (positively) related to the information content of dividends.     

Abnormal trading volume,news and market efficiency: Evidence from the Jamaica Stock Exchange

This paper investigates market efficiency of the Jamaica Stock Exchange (JSE). Together, weak and semi-strong form efficiency claim that historical and newly released public information do not predict future stock price movement. We test both forms of market efficiency by analyzing stock price behavior during times of abnormal trading volume and around the release dates of earnings information. Abnormal trading volume may be driven by liquidity demand or reflect new or private information flow to the market. Using JSE data over the period 2000 to 2021, we find price dynamics consistent with price pressure as firms experience negative abnormal returns on the day of abnormal trading activity but offsetting positive abnormal stock returns on the following day. Further findings show post earnings announcement drift on the JSE. Taken as a whole, the evidence suggests violations of market efficiency and has implications for capital allocation in this emerging market.     

Institutional Investor Participation and Stock Market Anomalies

This paper investigates the impact of institutional trading volume on stock market anomalies. The paper proposes a measure that evaluates the percentage of total trading volume of a stock accounted for by institutional trades. The empirical analyses using a large sample of firms from 1980–2005 provide strong evidence that the strength of stock market anomalies such as price momentum, post‐earnings announcement drift, the value premium, and the investment anomaly is decreasing in institutional trading volume. Additionally, the effects of institutional trading volume are stronger than those of institutional ownership, the major measure of institutional investor participation in the finance literature. These findings suggest that institutional trading significantly improves stock price efficiency.