Shareholder wealth,information signaling and the specially designated dividend: An empirical study

This paper examines common stock returns and dividend and earnings patterns surrounding specially designated dividends labeled by management as ‘extra’, ‘special’ or ‘year-end’ and compares them to those surrounding regular (unlabeled) dividend increases. The results support the notion that management uses the labeling of dividend increases to convey information to the market about the future potential of the firm. Unlabeled increases appear to contain the most positive information. Contrary to the sometimes suggested view, specially designated dividends appear to convey positive information about future dividends and earnings beyond that relating to the current period.     

Does the market overweight imprecise information? Evidence from customer earnings announcements

We examine how supplier-firm shareholders respond to the earnings announcements of their major customers to test the moderated confidence hypothesis, which predicts overreaction to imprecise signals. In our setting, the moderated confidence hypothesis predicts that supplier shareholders will overreact to customer earnings news because that news contains imprecise information about the suppliers’ future cash flows. We find evidence that supplier earnings announcement abnormal returns are negatively correlated with supplier abnormal returns at the earlier customers’ earnings announcements, consistent with supplier overreaction. We also find evidence that the overreaction declines with the strength of the economic ties between the supplier and the customer.     

Underreaction to Dividend Reductions and Omissions?

Using a sample of 2,337 cash dividend reduction or omission announcements over the 1927 to 1999 period, this study reports significant negative post‐announcement long‐term abnormal returns, which last 1 year only. However, this long‐term abnormal performance is driven by the post‐earnings‐announcement drift. After controlling for the earnings performance and the skewness of buy‐and‐hold abnormal returns, there is no compelling evidence of a post‐dividend‐reduction or post‐dividend‐omission price drift.     

Earnings Announcements,Differences of Opinion and Management Guidance

Berkman, Dimitrov, Jain, Koch, and Tice (2009) document a negative relationship between differences of opinion and earnings announcement returns, and this relationship is more pronounced when short‐sale constraints are likely to be high. These findings are interpreted as support for the theory in Miller (1977) that binding short sale constraints cause pessimists to be underrepresented in price formation. We conjecture that accounting information (i.e., earnings news) is likely to play a role in this returns pattern. After controlling for the level of earnings news, we find that the relationship between differences of opinion and stock returns is either eliminated or opposite from what is predicted by Miller's theory. Further, we present evidence that suggests the confounding effect of earnings news can be explained by (pessimistic) management earnings guidance. Our findings offer an alternative explanation for why low differences of opinion stocks earn greater abnormal returns around earnings announcements.     

The informational content of the timing of dividend announcements

This paper contains a test of a new aspect of the informational content of dividend; namely, is there information in the timing of the announcements? The empirical evidence indicates that the market expects ‘bad news’ to be delivered late and that these expectations are confirmed. Mean excess returns of stock prices around late announcements are, depending on the assumed returns generating process, either significantly negative or insignificant while significantly positive around the entire population of announcements. Moreover, the proportion and magnitude of dividend reductions associated with late announcements are significantly larger than in the complete universe of announcements.     

Abnormal returns to investment strategies based on the timing of earnings reports

This paper adds to recent evidence on market inefficiency in processing information in earnings reports. It documents that short positions taken in sample stocks which did not report earnings by the date expected during the sample period, 1971–1976, would have been abnormally profitable, before transaction costs. This is because late reports, on average, revealed bad news which was not anticipated in market prices prior to the report date. The magnitude of the average abnormal returns is in the order of 1.0% over 20 days but is larger for smaller firms in the sample and positively related to the length of the reporting delay. The paper also documents that long positions taken in stocks reporting early with good news would have generated abnormal returns of approximately 1.0% on average over a 20-day holding period.     

Dividend signaling under economic adversity: Evidence from the London Stock Exchange

The signaling or information content hypothesis is amongst the most prominent theories attempting to explain dividend policy decisions. However, no research has, to date, examined the information content of dividends in conjunction with generalized economic adversity. With the majority of the western economies facing the tough reality of the economic recession since late 2007–early 2008, we focus on the possibility of asymmetrical dividend signaling effects between periods of stability and economic adversity. Using data from the London Stock Exchange (LSE), where earnings and dividend news are released simultaneously, we test the dividend signaling hypothesis and the interaction of earnings and dividends under both steady and adverse economic conditions. We document positive and significant average abnormal stock price returns around the dividend/earnings announcements. We also find a significant interaction between economic conditions and the information content of dividends. After testing the dividend signaling hypothesis under both stable and recessionary economic conditions we find that dividends have less information content than earnings in periods of growth and stability, but more in periods of economic adversity.     

THE IMPACT OF UNEXPECTED EARNINGS AND DIVIDENDS ON ABNORMAL RETURNS TO EQUITY

This paper contributes to the empirical literature which documents the existence of a positive association between unexpected earnings and/or dividend announcements and abnormal returns to equity. The paper addresses some of the methodological limitations evident in the literature. In particular, one methodological difficulty encountered by previous studies is that since earnings and dividend announcements are usually made contemporaneously it is difficult to assess the marginal effect of either announcement on security returns. This problem is dealt with by constructing portfolios of securities which are randomized with respect to unexpected earnings (dividends), but which are systematically ranked on unexpected dividends (earnings). The results indicate that unexpected earnings announcements have a significant marginal impact on abnormal returns. In addition, there is evidence of an impact of unexpected dividends on returns, but it is weaker than unexpected earnings.     

To Be or Not Be …'Too Late': The Case of the Belgian Semi-annual Earnings Announcements

In this study, we demonstrate that the average reporting lag of Belgian interim reports is large but has decreased slightly over the years 1991–1998. Contrary to US findings, we show that the disclosure of interim reports containing bad (good) news is not systematically delayed (speeded up). Interim reports are value relevant since good (bad) news, according to a naïve earnings expectations model, induces positive (negative) abnormal returns. The 'short term' timeliness of the information disclosure, however, seems not to matter at all.     

Individual Investor Trading and Return Patterns around Earnings Announcements

This paper provides evidence of informed trading by individual investors around earnings announcements using a unique data set of NYSE stocks. We show that intense aggregate individual investor buying (selling) predicts large positive (negative) abnormal returns on and after earnings announcement dates. We decompose abnormal returns following the event into information and liquidity provision components, and show that about half of the returns can be attributed to private information. We also find that individuals trade in both return‐contrarian and news‐contrarian manners after earnings announcements. The latter behavior has the potential to slow the adjustment of prices to earnings news.     

SEC product-line reporting and market efficiency

This study tests the efficiency of the securities market with respect to non-public segment earnings data for 1967–1969 which was first made public by many firms in 1970 SEC 10-K reports. Trading rule strategies are proposed in which segment-based earnings forecasts are compared to consolidated-based forecasts to anticipate ‘unexpected’ changes in earnings. Using the ‘market model’ to eliminate market related movements in security prices, average monthly abnormal returns conditional on this segment-based strategy are estimated for 1968, 1969, and 1970 for two groups of firms: (1) ‘Non-disclosure’ firms that did not publicly report either segment revenue or profit data prior to 1970, and (2) ‘partial disclosure’ firms that publicly reported segment revenue information, but no segment profits, prior to 1970.The results suggest that the market was not efficient with respect to the non-public segment revenue and profit data of non-disclosure firms for 1968–1969. However, this finding could not be replicated for 1970. The average monthly abnormal returns conditional on the segment-based trading rule strategy were found to be relatively small for the partial disclosure firms. This suggests that segment revenue data can be used to successfully anticipate changes in total entity earnings which would otherwise be ‘unexpected’ if only consolidated data were available.     

THE INFORMATION CONTENT OF DIVIDEND CHANGES

In this study, the open empirical question as to whether or not dividends contain information is investigated. The study involves 200 stocks and 376 dividend announcements over the 1971 to 1977 period; measures of unexpected dividends are related to measures of abnormal returns for dividend changing stocks. This study is important for three reasons:

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Earnings and Dividend Announcements: Is There a Corroboration Effect?

We examine abnormal stock returns surrounding contemporaneous earnings and dividend announcements in order to determine whether investors evaluate the two announcements in relation to each other. We find that there is a statistically significant interaction effect. The abnormal return corresponding to any earnings or dividend announcement depends upon the value of the other announcement. This evidence suggests the existence of a corroborative relationship between the two announcements. Investors give more credence to unanticipated dividend increases or decreases when earnings are also above or below expectations, and vice versa.     

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.     

A comparison of the skewness of stock return distributions at earnings and non-earnings announcement dates

This paper presents evidence that stock return prediction errors are less positively skewed in the time period surrounding accounting earnings report announcements than in a subsequent non- announcement period. Assuming that information available about firms in non-announcement periods depends on discretionary disclosure practices of firms and discretionary search for information by investors, the results suggest that earnings reports cause more extreme ‘bad news’ to be reflected in stock prices relative to discretionary sources of information.     

The post–announcement performance of dividend–changing companies: The dividend–signalling hypothesis revisited

This study revisits the dividend–signalling hypothesis by examining the post–announcement performance of U.K. companies which disclose dividend and earnings news to the capital market on the same day. For this purpose, we first analyse market–adjusted excess returns for three periods around the announcement and then examine the financial performance in the year of the announcement and in the subsequent five–year period. The near announcement excess returns and the announcement–year financial profiles provide strong evidence in support of the dividend–signalling hypothesis. However, in contrast to the predictions of the hypothesis, the longer–term results suggest that the companies which announce a reduction in both dividends and earnings (bad news companies) outperform their dividend–increasing counterparts.     

Dispersion in Analyst Forecasts and the Profitability of Earnings Momentum Strategies

This paper shows that the dispersion in analysts' consensus forecasts contains incremental information to predict future stock returns. Consistent with prior research, stock prices in the German market underreact to news about future earnings and drift in the direction suggested by analysts' forecasts revisions. Even higher abnormal returns can be achieved by applying such an earnings momentum strategy to stocks with a low dispersion in analyst forecasts. These results support one of the recent behavioural models in which investors underweight new evidence and conservatively update their beliefs in the right direction, but by too little in magnitude with respect to more objective information.     

Core Earnings Uncertainty,Dividend Change Announcements and the Reduction of Covariance Component Risks

We present evidence of two systematic market risk implications associated with core earnings news implicit in dividend change announcements: (1) a decline in firm‐market correlation intensity, consistent with reduced investor reliance on overall market movements to value shares, and (2) a downward shift in standard deviation of returns, consistent with increased core earnings information precision. Decoupling these two covariance component risk effects is important because they can offset one another at the firm level, masking unique market influences on total systematic risk. Each is influenced by the information environment in different ways and each is shown to incrementally explain returns in a manner consistent with the capital asset pricing model (CAPM).     

The puzzling behavior of short sellers around earnings announcements

We examine the performance of ‘predictive’ and ‘reactive’ short sellers who take relatively large short positions immediately before and after quarterly earnings announcements, respectively. While both types short into advancing markets, it is surprising for reactive shorts since their trades are in stocks that just announced unexpected good news and thus, according to the post-earnings announcement drift anomaly, will subsequently have abnormally high cumulative returns. Nevertheless, we find that for both types of short sellers: (1) subsequent cumulative returns are significantly negatively related to the amount of abnormal short selling, suggesting they are informed, and (2) relative to non-earnings dates, the subsequent returns around earnings announcements are significantly more negative, indicating they appear to be adept at exploiting earnings announcements. Surprisingly, we find that the subsequent returns of reactive short sellers are significantly greater than those of predictive short sellers except for S&P 500 stocks, perhaps due to their greater analyst following. Importantly, we are left with two puzzles. First, reactive shorts would have significantly improved their performance had they based their trades on the size of standardized unexpected earnings (‘SUE’). Second, predictive shorts of Micro stocks would have significantly improved their performance had they simply waited until earnings were announced and then based their trades on SUE.     

Is there information content from insider trading activities preceding earnings and dividend announcements in Hong Kong?

This study examines whether insiders (directors) exploit information advantage of their firms by trading stocks before the simultaneous earnings and dividend announcements in Hong Kong. Our findings show that there are significant net-insider-buying activities before the announcements of good news ('Earnings-Dividend Increase') and significant net-insider-selling activities before bad news ('Earnings-Dividend Decrease' and 'Earnings Decrease-Dividend Zero'). In addition, our regression results provide some support for the hypothesis that there is a predictive relation between pre-event insider trading activity and the abnormal return of the announcements.