Abstract
We argue that investors could have wrong initial beliefs about the information content of stock dividends. They gradually update their beliefs after learning from firm performance following stock dividend distributions. In support of the learning hypothesis, we document several new findings. We show that operating performance significantly declines after stock dividend distributions. Investors overreact to a firm's early stock dividend announcements and drastically lower the announcement return as the firm announces more and more follow-on stock dividends. Investor learning also reduces demands for stock dividends. The fraction of stock dividend payers sharply decreases from 14.0% in 1950s to merely 0.2% in 2010s. Institutional investor ownership is able to explain 92.5% of the temporal variation in the fraction of stock dividend payers.
Published Version
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