SENSITIVITY OF INVESTOR REACTION TO MARKET DIRECTION AND VOLATILITY: DIVIDEND CHANGE ANNOUNCEMENTS

We examine whether investor reactions are sensitive to the recent direction or volatility of underlying market movements. We find that dividend change announcements elicit a greater change in stock price when the nature of the news (good or bad) goes against the grain of the recent market direction during volatile times. For example, announcements to lower dividends elicit a significantly greater decrease in stock price when market returns have been up and more volatile. Similarly, announcements to raise dividends tends to elicit a greater increase in stock price when market returns have been normal or down and more volatile, although this latter tendency lacks statistical significance. We suggest an explanation for these results that combines the implications of a dynamic rational expectations equilibrium model with behavioral considerations that link the responsiveness of investors to market direction and volatility.     

MARKET VOLATILITY AND PERVERSE TIMING PERFORMANCE OF MUTUAL FUND MANAGERS

Prompted by the recent volatility in equity markets, I investigate performance evaluation methods and the mutual fund managers' ability to select undervalued investments and time major market movements during the high-market-volatility period of the 1980s. Specifically, I examine mutual fund managers' stock-selection and market-timing abilities by employing a five-factor risk-adjusted model based on Carhart's four-factor loading model and Bhattacharya and Pfleiderer's quadratic timing model adjusted for perverse timing behavior. Individually, some managers persistently affect fund performance through the selection of undervalued investments, however, at the expense of timing performance. In addition, funds that demonstrate an ability to time major market movements showed persistence in timing performance before and after the October market crash of 1987.     

PROFITABILITY, EARNINGS ANNOUNCEMENT TIME LAGS, AND STOCK PRICES

This research addresses (1) whether firms with lower (hgher) than expected earnings fgures released those figures to the public later (earlier) than expected and (2) whether there is a reaction by the capital market to the timing of the earnings announcement. The results indicate that later than expected earnings announcements are likely to contain worse news than early announcements. Also the stock returns of late reporting firms appear to be lower than that of early reporting firms in the days surrounding the earnings announcement date.     

STOCK PRICE REACTIONS TO DIVIDEND AND EARNINGS ANNOUNCEMENTS: CONTEMPORANEOUS VERSUS NONCONTEMPORANEOUS ANNOUNCEMENTS

In this paper we examine stock price reactions to contemporaneous and noncontemporaneous dividend and earnings announcements. Overall, the stock price reaction to joint announcements is significantly greater than the reaction to just one signal. This implies that there is information content to two signals being given simultaneously, and that announcements are not perfect substitutes. Some evidence shows that the reaction to a joint announcement is approximately twice that to a noncontemporaneous announcement. On average, the stock price reaction to joint contradictory announcements is not significant. Finally, for joint announcements where only one of the two announcements is expected to affect the stock price significantly, the market reaction is determined by the nonzero signal.     

THE EFFECTS OF THE ANNOUNCEMENTS OF DIVIDEND INCREASES ON STOCK RETURN VOLATILITY: THE EVIDENCE FROM THE OPTIONS MARKET

This paper examines the impact of the announcements of dividend increases on the volatility of underlying stock returns implied by option prices, and analyses whether the impact is related to the label associated with the dividend increase. The results suggest that the announcements of labelled dividend increases are accompanied by a decrease in implied volatility, while the announcements of unlabelled increases in dividends are associated with no change in implied volatility. These results are consistent with the hypothesis that signal implicit in the announcements of dividend increases provides noisy information about the firm's volatility.     

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.     

RISK PREMIUM EFFECTS ON IMPLIED VOLATILITY REGRESSIONS

This article provides new insights into the sources of bias of option implied volatility to forecast its physical counterpart. We argue that this bias can be attributed to volatility risk premium effects. The latter are found to depend on high‐order cumulants of the risk‐neutral density. These cumulants capture the risk‐averse behavior of investors in the stock and option markets for bearing the investment risk that is reflected in the deviations of the implied risk‐neutral distribution from the normal distribution. We show that the bias of implied volatility to forecast its corresponding physical measure can be eliminated when the implied volatility regressions are adjusted for risk premium effects. The latter are captured mainly by the third‐order risk‐neutral cumulant. We also show that a substantial reduction of higher order risk‐neutral cumulants biases to predict their corresponding physical cumulants is supported when adjustments for risk premium effects are made.     

FIRM SIZE AND DIVIDEND ANNOUNCEMENTS

This study documents an association between firm size and abnormal returns from the announcement of large dividend increases. Dividend announcements are examined only where there are no contemporaneous earnings announcements. The methodology controls for both the payout ratio of firms and the size of the dividend increase. Using means tests and analysis of variance, the findings indicate that the abnormal stock price reaction to a dividend increase is greater for small firms.     

THE EFFECTS OF INSIDER TRADING RESTRICTIONS: EVIDENCE FROM HISTORICAL DIVIDEND INITIATIONS AND OMISSIONS

We investigate whether insider trading restrictions had their intended effects during the 1960s and 1970s. We examine insider trading and stock market behavior before dividend initiations and omissions announced between 1935 and 1974. Contrary to existing research and commentary, we show that restrictions had meaningful effects. During the 1960s and 1970s, insiders sold less frequently before dividend omissions, and the average profitability of insider trades declined. In addition, the positive (negative) stock price runup before dividend initiations (omissions) decreased after 1961. The results provide some vindication for the Securities and Exchange Commission's adjudicative approach toward insider trading regulation.