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.