On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing

We investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find statistically and economically significant predictability in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus issuances) yields are used instead of the dividend yield. Similarly, we find that payout (net payout) yields contains information about the cross section of expected stock returns exceeding that of dividend yields, and that the high minus low payout yield portfolio is a priced factor.     

Ex-Day Behavior: Tax or Short-Term Trading Effects

This study examines the behavior of share prices around the ex-dividend dates before and after the introduction of the 1988 Income and Corporation Taxes Act that reduced substantially the tax differential between dividends and capital gains in the United Kingdom. We find that, in the pre-1988 period when the differential taxation of dividends and capital gains is high, ex-day returns are positive and significant. In contrast, in the post-1988 period, ex-day returns are, in most cases, negative and insignificant. Further analysis reveals that, while ex-day returns are significantly related to dividend yield and to the length of the settlement period, they are not affected by the commonly used measures of transaction costs, such as the bid-ask spread and trading volume, or by the day of week, month of the year, type of dividend distribution, or number of days to the actual receipt of the cash dividend. We conclude that taxation affects significantly ex-day share prices in the United Kingdom.     

CONSIDERING DIVIDEND STABILITY IN THE RELATION BETWEEN DIVIDEND YIELDS AND STOCK RETURNS

Previous studies show that firms with long records of paying stable dividends are unique. However, research on the relation between dividend yields and stock returns focuses on shorter-term dividend yield measures without considering long-term dividend stability. This article shows that high-yield stocks are not in fact homogeneous, but that stocks with high yields and stable dividends behave differently from stocks with only a high yield. These differences persist even after controlling for firm size, the January effect, and systematic risk, suggesting distinctive risk characteristics for stocks with both high yields and stable dividends.     

Personal taxes and the time variation of stock returns – evidence from the UK

A potential explanation for the time-series predictability of market returns with dividend yields is the differential tax treatment of capital gains and dividends. This article investigates to what extent the predictability of long-horizon returns can be explained by this tax effect. Assuming that after-tax expected returns are constant, we test the derived relationships between pretax returns and lagged dividend yields with UK data. We also compare the predictability of before-tax long-horizon returns with that of after-tax returns. The results indicate that the tax treatment of dividends does not significantly contribute towards the predictability of stock returns.     

Understanding Stock Price Volatility: The Role of Earnings

In an efficient capital market, asset prices vary when investors change their expectations about cash flows, discount rates, or both. Using dividends to measure cash flows, previous research shows that the aggregate dividend‐price ratio varies due to changes in expected discount rates (returns) rather than expected cash flows. In contrast, using accounting earnings instead of dividends as a measure of cash flows, this paper shows that as much as 70% of the variation in the dividend‐price ratio can be explained by changes in expected earnings. Moreover, the paper documents a significant negative correlation between expected returns and expected earnings, suggesting that variations in a common factor to both may generate significant price volatility. The results are consistent with the dividend‐policy irrelevance hypothesis.     

Stock Price Adjustment to the Information in Dividend Changes

This paper examines abnormal stock returns in the three years surrounding relatively large changes in dividends announced during the 1971 to 1990 period. The main results are that statistically and economically significant negative post-announcement abnormal returns of 11% and 17% over the post-announcement year are found for firms which decrease dividends and those which omit their dividends. Firms resuming and firms increasing dividends do not exhibit significant abnormal returns, on average, over the post-announcement year. The pattern of lagged price adjustment to negative dividend change information differs from that reported for 'earnings surprise' firms in important respects. While the dividend change firms do exhibit returns behavior consistent with year-to-year returns momentum, differences in prior year returns do not explain the differences in returns over the post-announcement period.     

The relative pricing of European dividend futures and their predictive abilities for index returns

We use dividend futures prices to derive a dividend future discount model. Arbitrage arguments postulate that the sum of discounted dividend futures prices should equal the index price, i.e. the sum of discounted dividends. We analyze whether this relation holds and find that the two valuation approaches lead to a different valuation of expected dividends. These observations indicate that dividend futures and index prices seem to provide the investor with different information on future dividends. We further show that the difference in valuation can be used to forecast index returns and show how an investment strategy can exploit this predictability.     

A Dividend Payment Effect in Stock Returns

This paper presents evidence for the period 7/62-12/89 that individual NYSE and AMEX stocks provide relatively high average excess returns on the payment dates of quarterly cash dividends and several subsequent trading days. Additional results indicate that returns during the payment period: (a) are not a manifestation of the January, monthly or dividend yield anomalies; (b) are positively related to the stock's dividend yield; and (c) are higher for firms that have dividend reinvestment plans. These findings are consistent with a tendency by stock-holders to reinvest dividend income into the stock of the paying firm, thereby increasing demand for the stock and raising its price. Additional evidence links the returns on these days with (previously-documented) excess returns around the ex-dividend date.     

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.     

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.     

Dividends,Corporate Monitors and Agency Costs

We report new evidence on the hypothesis that dividends reduce agency costs. Consistent with dividends as a mechanism to reduce agency costs, we find that, on average, firms with a majority of strict outside directors on their boards experience significantly lower mean abnormal returns around the announcements of sizeable dividend increases. Our results are robust to multivariate controls for firm size, leverage, ownership, growth options, and change in dividend yield. However, we find no evidence that dividend increases reduce agency costs as measured by poison pills or outside blockholdings.     

Dividend Dynamics and the Term Structure of Dividend Strips

Many leading asset pricing models are specified so that the term structure of dividend volatility is either flat or upward sloping. These models predict that the term structures of expected returns and volatilities on dividend strips (i.e., claims to dividends paid over a prespecified interval) are also upward sloping. However, the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their proposed dividend dynamics with processes that generate stationary leverage ratios. Under such policies, shareholders are forced to divest (invest) when leverage is low (high), which shifts risk from long‐ to short‐horizon dividend strips.     

The information content of cash dividend announcements in a unique environment

Due to its distinctive institutional background, Oman offers a valuable opportunity to examine stock price reactions to dividend announcements. In Oman, (1) there are no taxes on dividends and capital gains, (2) there is a high concentration of share ownership, (3) there is low corporate transparency, and (4) firms frequently change their dividends. Our results show that announcements of dividend increases are associated with increased stock prices, while announcements of dividend decreases cause decreases in stock prices. Firms that do not change their dividends experience insignificant negative returns. These results contradict tax-based signaling models, which argue that higher taxes on dividends relative to capital gains are a necessary condition for dividends to be informative.     

Does Dividend Policy Relate to Cross‐Sectional Variation in Information Asymmetry? Evidence from Returns to Insider Trades

We examine the relation between dividends and information asymmetry by using insider returns as a proxy for information asymmetry. We find that dividends are negatively related to returns to insider trades across firms. Firms that pay consistently high dividends have lower insider returns than do firms that pay consistently low dividends. These results do not support traditional dividend signaling models. Rather, they are consistent with the proposition that firms with the highest dividends have the lowest levels of information asymmetry.     

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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Stock returns,dividend yield,and book-to-market ratio

A dividend yield model has been widely used in previous research that relates stock market valuations to cash flow fundamentals. Given controversies about using dividends as a proxy for cash flows, a loglinear book-to-market model has recently been proposed. However, these models rely on the assumption that dividend yield and book-to-market ratio are both stationary, and empirical evidence for this is, at best, mixed. We develop a new model, the loglinear cointegration model, that explains future profitability and excess stock returns in terms of a linear combination of log book-to-market ratio and log dividend yield. The loglinear cointegration model performs better than the log dividend yield model and the log book-to-market model in terms of cross-equation restriction tests and forecasting performance comparisons. The superior performance of the loglinear cointegration model suggests that the linear combination may be a better indicator of intrinsic fundamentals than the dividend yield or the book-to-market ratio separately.     

Dividend Dynamics,Learning, and Expected Stock Index Returns

We present a latent variable model of dividends that predicts, out‐of‐sample, 39.5% to 41.3% of the variation in annual dividend growth rates between 1975 and 2016. Further, when learning about dividend dynamics is incorporated into a long‐run risks model, the model predicts, out‐of‐sample, 25.3% to 27.1% of the variation in annual stock index returns over the same time horizon, with learning contributing approximately half of the predictability in returns. These findings support the view that investors' aversion to long‐run risks and their learning about these risks are important in determining stock index prices and expected returns.     

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.     

STOCK DIVIDENDS AS SIGNALS

This study analyzes stock dividends as signals from managers. It is argued that in the presence of information asymmetries between managers and investors, stock dividends provide a relatively inexpensive and unambiguous signalling device. Based on an examination of the daily returns around 317 stock dividend announcements, it is concluded that these announcements are interpreted by investors as signals from managers. Further analysis also indicates that stock dividend size is positively related to announcement day returns.     

Payout Policy Tax Clienteles,Ex‐dividend Day Stock Prices and Trading Behavior in Germany: The Case of the 2001 Tax Reform

This paper examines the impact of the German 2001 tax reform, where Germany switched from a full imputation system to a classical system. Theory suggests that both price drop ratios and trading volume decrease following the reform. We document a significant reduction in the valuation of net dividends–in particular for high dividend yield stocks–and weakening payout policy tax clienteles. Ex‐dividend day returns are likely to be driven by short‐term traders. Though the reform removed incentives for cross‐border dividend stripping and reduced tax heterogeneity among investors, we show that the high trading volume around ex‐dividend days persists.