Dividend information, stock returns and market efficiency-II

Abstract

This is the second part of a study about common stock returns around split events (Part I) and dividend change events (Part II) as revealed in the 1947–1967 experience of the New York Stock Exchange (NYSE). Part I is the subject of a companion article in this issue of the Journal. The evidence about splitting stocks was found in many ways consistent with the efficient capital markets hypothesis, slightly method-dependent and time-dependent to an appreciable degree. By contrast, the results from Part II presented below point to persistent inefficiencies in the market. In almost any way one looks at the stocks' residuals in the months following the selected dividend changes, decreases in particular, they turn out abnormally large. The interpretation is advanced that, on the average, the NYSE under-reacts when dividend changes are announced. The possibility is also recognized that unexplored basic problems with the residual approach could account for the abnormal results.