Are stock dividends (MUSHOs) melons or lemons in Japan?

Abstract

Whether stock dividends are favorable or unfavorable has been a topic of debate for many years. With real transaction costs involved and without a real effect on the firms' value, stock dividends are often described as “lemons”. When the announcements of stock dividends are associated with increases in future cash dividends, they are perceived favorably as “melons”. Given the dividend payout practice in Japan, the market, on average, reacts positively to Musho-koufu (MUSHO) announcements. Moreover, the market reaction is greater for MUSHOs with higher distribution ratios. Further analysis indicates that MUSHOs of higher distribution ratios are associated with greater increase in dividend payments in the future years than MUSHOs of smaller ratios. However, MUSHOs may not be as good as they appear on average. The three-day cumulative abnormal returns around announcement day range from −12.90% to 28.37%. In addition, among all the MUSHO announcements, about 38.6% incur a negative market reaction. Obviously, some MUSHOs are not perceived favorably by the market. In general, we offer some clues as to which stock dividends are more likely to be favorably or unfavorably perceived. MUSHOs with a higher distribution ratio and an increase in investment are more favorably perceived by the market. MUSHOs by firms that belong to keiretsu groups are also regarded favorably.