Market response to dividend change announcements: unregulated versus regulated US firms

This paper attempts to determine whether there is a significant difference in how the stock market responds to dividend change announcements of regulated (both utilities and financials) versus unregulated firms and, if so, which factors cause this difference. An analysis of dividend change announcements of US firms over the period 1962–2016 shows that the market response is larger for unregulated than for regulated firms, but this difference is statistically significant only for dividend increases (not for dividend decreases). Further, cross-sectional analysis indicates that, for dividend increases, the difference between regulated and unregulated firms increases with diffused ownership and informational asymmetry. When both these factors are controlled for, the difference between regulated and unregulated firms becomes statistically insignificant. Thus, the evidence suggests that the significant difference in market response to dividend increases of regulated versus unregulated firms can be explained by differences in diffused ownership and informational asymmetry. There seems to be no intrinsic difference between regulated and unregulated firms in the market response to dividend decreases.     

Signaling, investment opportunities, and dividend announcements

This article examines potential explanations for the wealtheffects surrounding dividend change announcements. We find thatnew information concerning managers' investment policies isnot revealed at the time of the dividend announcement. We alsofind that dividend increases (decreases) are associated withsubsequent significant increases (decreases) in capital expendituresover the three years following the dividend change, and thatdividend change announcements are associated with revisionsin analysts' forecasts of current earnings. These results areconsistent with the cash flow signaling hypothesis rather thanthe free cash flow hypothesis as an explanation for the observedstock price reactions to dividend change announcements.     

Short selling around dividend announcements and ex-dividend days

We examine short selling around dividend announcements and ex-dividend dates. Contrary to our initial expectation, we do not find abnormally high short-selling activity prior to announced dividend decreases, which runs counter to the argument that short sellers have the ability to acquire private information before its public dissemination. However, we find that the common negative relation between current short selling and future daily returns prior to unfavorable dividend announcements is similar to the negative relation during non-event times, suggesting that dividend announcements do not provide unusual trading opportunities for informed traders (Gonedes, 1978, and Benartzi et al., 1997). Around ex-dividend dates, we do find abnormal short selling, which may be explained by the return pattern around ex-dividend days documented by Lakonishok and Vermaelen (1986), who suggest that demand for a particular stock by dividend capture traders drives stock prices above their fundamental value thus providing a profitable trading opportunity for short sellers. Consistent with this conjecture, we find that both the level of short selling and the return predictability of short selling is markedly higher on and after the ex-dividend day than during non-event times.     

Revisiting the corroboration effects of earnings and dividend announcements

Using a unique market setting in Hong Kong, where (i) all firms release earnings and dividend information in the same announcement; (ii) corporate transparency is low; (iii) dividend income is non‐taxable and (iv) corporate ownership is highly concentrated, we re‐examine the corroboration effects of earnings and dividends. We use the control firm approach to avoid the return estimation bias resulting from observation clustering. We also add in variables and use econometric procedure to control for the potential impacts of earnings management, special dividends and heteroskedasticity. Our findings show that there exists a corroboration effect between the jointly announced signals.     

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.     

Alternative event study methodology for detecting dividend signals in the context of joint dividend and earnings announcements

Friction models are used to examine the market reaction to the simultaneous disclosure of earnings and dividends in a thin‐trading environment. Friction modelling, a procedure using maximum likelihood estimation, can be used to replace both the market model and restricted least‐squares regression in event studies where there are two quantifiable variables and a number of possible interaction effects associated with the news that constitutes the study's event. The results indicate that the dividend signal can be separated from the earnings signal.     

Predictable events and excess returns: The case of dividend announcements

This paper hypothesizes that the risk per unit of time and the required rate of return are higher than normal during an event period whose timing can be predicted. Consistent with this hypothesis this paper presents empirical evidence indicating that the unconditional mean rate of return, the variance of stock returns and their systematic risk are higher than ‘usual’ during dividend announcement periods. However, the documented increases in the systematic risk are not large enough to fully explain the ‘excess returns’. This finding is puzzling and hard to reconcile with existing theory.     

The market's perception of the information conveyed by dividend announcements

This paper tests whether the market perceives announced dividend changes to reflect information about current and/or future cash flows. The empirical relationship between dividend changes and earnings changes is inconclusive. Furthermore, there is no empirical evidence regarding the market's perception of managers' intentions in changing the level of dividends. By analyzing the price reaction of scores to an announced dividend change, we are able to isolate the effects of a short-term change and a long-term change. Our findings indicate that the market perceives dividend changes to reflect a long-term change in earnings.     

The ex-date impact of special dividend announcements: A note

This study examines the impact of special dividend announcements for a sample of Australian companies on the ex date of the special dividend. This study documents that the drop-off ratio is significantly greater for special dividends that participate in DRPs than non-DRPs. Further, it reveals that the drop-off ratio is greater for resources firms than for financial and industrial firms. Finally, a cross-sectional regression model reveals that the drop in price on the ex-date is significantly related to the announcement period price reaction, DRPs versus non-DRPs, size of the company, and special dividend per share.     

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.     

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.     

Market reaction to anticipated announcements

In this paper we analyze how anticipating a forthcoming public announcement affects the market reaction to the announcement by altering investors' incentives to acquire private information. Specifically, we study price change, volume, and information asymmetry at the time of the announcement. We also investigate how information acquisition, information asymmetry, price, and volume are influenced by the quality of prior knowledge, the marginal cost of gathering information, the degree of risk tolerance, and noise. Finally, we compare market reactions to anticipated announcements of known precision with the response to announcements that are either unanticipated or of uncertain quality.     

A macro-analysis of financial decisions: An examination of special dividend announcements

This paper investigates macro-level explanations for why firms pay special dividends. We find both the business cycle and market condition affect the propensity and abnormal returns of special dividends. Firms are more likely to announce special dividends in market or economic downturns than upturns. They tend to use additional cash for business growth in expansions and distribute it to reduce agency costs in contractions. The signaling effect of special dividends is stronger and companies with these announcements are better performers in recessions than in expansions. This research sheds light on and enhances the understanding of why firms disburse extra cash dividends at the aggregate level.     

Adverse selection, volume and transactions around dividend announcements in a continuous auction system

We show that liquidity providers do not significantly respond to changes in information asymmetry risks, at least when we analyse their trading behaviour around dividend announcements of a representative sample of stocks in a continuous auction trading mechanism. the implicit bid-ask spread does not seem to change beyond what is normally conveyed through an increased number of transactions. We also document that the information in the trading behaviour of investors is primarily contained in the number of daily transactions.     

Investor tax rationality and the relationship between dividend yields and equity returns: An explanatory note

Recently in this journal, it is contended that the empirically observed relationship between stock returns and dividend yields cannot be reconciled with tax rationality. In response, this present note re-examines the theoretical basis for this conclusion. We conclude that the empirical evidence of market behavior may at present be interpreted as consistent with investor tax-based rationality that capitalizes the firm's earnings on an after-personal tax basis.     

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.     

Under-or-overreaction: Market responses to announcements of earnings surprises

We test whether the well-documented market reaction to the announcements of earnings surprises is a manifestation of an investor underreaction or overreaction to extremely good or bad earnings news. Using the market reaction in the three-day period surrounding the announcements of extreme earnings surprises (i.e., SUE) in quarter Q_t as a reference point, we show that firms reporting a high (low) SUE in subsequent quarter Q_t + 1 that confirms their initial quarter Q_t SUE ranking in the same highest or lowest SUE quintiles generate an incremental price run that moves in the same direction as that of the initial SUE. However, the price impact of the confirming SUE signal is weaker than that of its initial SUE. Our findings are robust to the Fama-French three-factor daily regression extended by the momentum factor and a number of other robustness tests. Our result is not consistent with the prevalent view that investors underreact to earnings news. To the contrary, the evidence suggests an initial investor overreaction to extreme SUE signals.     

Wealth redistributions or changes in firm value: An analysis of returns to bondholders and stockholders around dividend announcements

Past studies indicate that stock prices are affected by announcements of unexpected dividend changes, i.e., unexpectedly large dividends are associated with positive stock price response. Two explanations of this empirical regularity, ‘the information content hypothesis’ and the ‘wealth redistribution hypothesis’, imply different bond price behavior around dividend announcements. The information content hypothesis predicts a positive bond price response to unexpectedly large dividends, while the wealth redistribution hypothesis predicts the opposite. This paper distinguishes between the relative importance of the two hypotheses by empirically investigating bond price behavior around dividend announcements. The evidence presented is consistent with the information content hypothesis. However, the gains associated with positive information are captured by the stockholders, while the losses are shared with the bondholders.     

Market uncertainty and the importance of media coverage at earnings announcements

We investigate whether increased investor demand for financial information arising from higher market uncertainty leads to greater media coverage of earnings announcements. We also investigate whether greater coverage during times of higher uncertainty further destabilizes financial markets because of greater attention-based trading or, alternatively, improves trading and pricing by lowering investor acquisition and interpretation costs. When uncertainty is higher, we find evidence of greater media coverage of earnings announcements and that the greater coverage leads to improvements in investor informedness, information asymmetry, and intraperiod price timeliness, and greater trade by both retail and institutional investors. In contrast to the media serving an expanded role in improving capital markets during more uncertain times, we fail to find that changes in firm-initiated disclosures lead to similar improvements and find that less frequent analyst forecast revisions exacerbate problems in capital markets during earnings announcements.