Contribution of Dividend Policy Stability to the Measurement of Dividend Announcement and Ex-Dividend Effects on the French Market

Abstract

The usefulness and the justification of the dividend policy constitute one of the most debated topic of the financial theory. In the dividend policy study, two dates have to be considered: the dividend announcement date and the ex-dividend day. The objective of our study is to add to the understanding of stock price reactions at the dividend announcement and at the ex-dividend day by introducing the dividend policy stability criterion in event studies. Results differ according to the event study carried out. Around the dividend announcement date, we observe discrepancies in cumulative abnormal returns according to the firm dividend policy level (low, medium or high) and the announced dividend. Consequently, the informational effect of dividend announcement appears to be different according to the firm dividend policy level. The most interesting results are obtained around the ex-dividend days. When the market knows the firm dividend policy level, the dividend clientele effect seems to be extremely limited. Indeed, we notice a very low increase of Elton and Gruber ratio ((Pb-Pa)/D) according to the dividend yield level. This result may introduce doubt over the dividend clientele hypothesis.