Dividend Change Announcements Research Articles

Dividend change announcements, ROE, and the cost of equity capital

We hypothesize and present strong evidence that dividend increases (decreases) result in a general decrease (increase) in the opportunity cost of equity capital (Ke), measured by the discount rate implicit in analysts' forecasts. Estimates of Ke obtained from analyst forecast data likely capture priced information risk that is not reflected in cost of equity capital estimates customarily obtained from empirical excess returns data. In the presence of a full menu of control variables, our measured changes in the cost of equity capital are shown to provide high explanatory power for the market reaction to dividend change announcements. We also hypothesize and demonstrate that the impact of dividend changes on the cost of equity is conditional on how preannouncement Ke relates to preannouncement return on equity (ROE). Specifically, dividend increases result in a reduction in the cost of equity capital only when currently experienced ROE < Ke. This is consistent with shareholders preferring earnings to be reinvested by managers to earn a higher rate than their opportunity rate. When ROE > Ke, on the other hand, the cost of equity capital actually increases. For dividend decreases, the cost of equity capital increases only when ROE > Ke, consistent with firms currently experiencing positive economic income using dividend cuts to signal anticipated permanent earnings declines. Together with extensive robustness tests, our results indicate that dividend changes significantly affect shareholder value, contrary to the longstanding dividend irrelevance argument.

Understanding Bank Payouts during the Crisis of 2007–2009

Abstract We study U.S. banks’ payout policy in 2007–2008. We benchmark these payouts against payouts before the crisis, measure stock price reactions to announcements of dividend changes, and analyze changes in the relation between payout growth and future performance. Further, we examine cross-sectional variation in banks’ payout policy to gauge the possible motives underlying banks’ payout decisions in 2007–2008. We do not find that banks that have a higher willingness to take risk or that have higher incentives to undertake asset substitution use their payout policy to engage in more wealth transfer compared to other banks. (JEL G21, G24, G28, G32, G35). Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Signaling Hypothesis and Size Anomaly in Indian Stock Market

The dividend signaling hypothesis means that dividend change announcements send signals to the market about its prospects. Market capitalization anomaly or size effect means small-cap stocks variances and returns are different than the large-cap stocks. The sample was tested for dividend change announcement, and the sample was divided into large, medium, and small sample sizes based on the market capitalization of the stocks to test the size effect. Event methodology market model used to calculate the abnormal returns on the dividend announcement day. We found that dividends send signals to the market, and the market reacts positively to the dividend change announcements on event day (Aharony and Swary 1980, Litzenberger and Ramaswamy 1982, Dhillon and Johnson 1994, Below and Johnson 1996), but results may vary with the size of the company. Small-cap companies&amp;#39; variances are higher than the large-cap and mid-cap companies, and also small-cap variances are not equal to other variances results similar to Wong (1989), Bandara and Samarakoon (2002), Sehgal and Tripathi (2006), and Switzer (2010). Finally, we concluded that the dividend signaling hypothesis and market capitalization or size effect anomaly exist in the Indian stock market

Opportunistic earnings management or performance-related effects? Evidence from dividend-paying firms

We propose that much of the variation in standard (accruals and real-activities) earnings management metrics can be explained by firms' performance trajectories. We test our proposition using dividend change to distinguish high from low performance trajectory firms. We find that standard earnings management metrics have a stronger relation with performance trajectories than with unexpected earnings, a presumed target of earnings management. Firms that appear to manage earnings more are likelier to increase their dividends, but standard earnings management metrics do not explain changes in firm value around dividend change announcements. Applying standard earnings management metrics without taking performance trajectories into account can result in mistaking managers' efforts to increase firm value for earnings management.

R2 and the corporate signaling effect

AbstractIf corporate announcements provide additional signals about firms' future prospects, the degree of investors' dependency on these news should vary with the relative importance of firm‐specific information on such publicly traded firms. We show that price, volume and volatility reactions to dividend change announcements are significantly stronger for less synchronized firms (e.g., low R2 stocks). This indicates that lower R2 stocks are less informative and thus more surprises on firm‐specific news are experienced. These findings are particularly strong for dividend decrease announcements. We also show that signals about firms' earnings prospects from dividend decrease announcements are more reliable among these companies.

Dividend Signaling Hypothesis, Semi-strong form of Hypothesis and Market Capitalization Anomaly in Indian Stock Market

The dividend signaling hypothesis means that dividend change announcements send signals to the market about its prospects. Market capitalization anomaly or size effect means small-cap stocks variances and returns are different than the large-cap stocks. The sample was tested for dividend change announcement, and the sample was divided into large, medium, and small sample sizes based on the market capitalization of the stocks to test the size effect. Event methodology market model used to calculate the abnormal returns on the dividend announcement day. We found that dividends send signals to the market, and the market reacts positively to the dividend change announcements on event day (Aharony and Swary 1980, Litzenberger and Ramaswamy 1982, Dhillon and Johnson 1994, Below and Johnson 1996), but results may vary with the size of the company. Small-cap companies' variances are higher than the large-cap and mid-cap companies, and also small-cap variances are not equal to other variances results similar to Wong (1989), Bandara and Samarakoon (2002), Sehgal and Tripathi (2006), and Switzer (2010). Finally, we concluded that the dividend signaling hypothesis and market capitalization or size effect anomaly exist in the Indian stock market

Market response to dividend change announcements: unregulated versus regulated US firms

AbstractThis paper attempts to determine whether there is a significant difference in how the stock market responds to dividend change announcements of regulated (both utilities and financials) versus unregulated firms and, if so, which factors cause this difference. An analysis of dividend change announcements of US firms over the period 1962–2016 shows that the market response is larger for unregulated than for regulated firms, but this difference is statistically significant only for dividend increases (not for dividend decreases). Further, cross‐sectional analysis indicates that, for dividend increases, the difference between regulated and unregulated firms increases with diffused ownership and informational asymmetry. When both these factors are controlled for, the difference between regulated and unregulated firms becomes statistically insignificant. Thus, the evidence suggests that the significant difference in market response to dividend increases of regulated versus unregulated firms can be explained by differences in diffused ownership and informational asymmetry. There seems to be no intrinsic difference between regulated and unregulated firms in the market response to dividend decreases.

The preholiday corporate announcement effect

We find that investors react more favorably to corporate announcements of share repurchases, SEOs, earnings, dividend changes, and acquisitions if the announcement is made immediately prior to or on holidays. These announcements are associated with more positive reactions for favorable events and less negative reactions for unfavorable events. This effect is robust to controls for market conditions and a selection bias, is accompanied by subsequent reversals, and is present in several international markets. Our findings suggest that predictable individual mood changes can cause biases in market reactions to firm-specific news.

When are dividend increases bad for corporate bonds?

AbstractEmploying an event study approach, we examine 5,574 bond return reactions to unexpected quarterly dividend change announcements in the U.S. corporate bond market over the period 2002–2014. On average, bond price reaction is in the same direction as dividend changes, which supports the hypothesis that dividend changes signal future firm performance. However, the price reaction varies significantly in the spectrum of bond's risk. Importantly, we document that some bondholders react negatively to unexpected dividend increases, indicating a wealth transfer effect. Such wealth transfer effect is most likely to occur in very high risk bond approaching maturity issued by firms with a low level of cash and incorporated outside Delaware.

The impact of dividend announcements on share price and trading volume

PurposeThe purpose of this paper is to investigate the stock market response to dividend announcements in high growth emerging markets of Gulf countries.Design/methodology/approachThe sample includes 1,092 dividend announcements from 299 listed firms over the period 2010-2015.FindingsIn the environment where there is an absence of capital gain and income tax, the authors find some evidence for the stock price reaction that partly supports the signaling hypothesis. The findings show that the Gulf Cooperation Council (GCC) market is inefficient because of the leakage information before the announcement in bad news, and the delay of share price adjustment in good news. In addition, the authors report significant trading volume (TV) reaction in all the three announcements clusters, where dividends increase, decrease, and are constant, lending support to the hypothesis that the dividend change announcements have an impact on the TV response due to different investors’ preferences.Originality/valueThis is the first empirical paper on market reaction in share price and TV around dividend announcement using data for the majority of GCC countries.

Firm Performance and Earnings Management Around Dividend Change Announcements

Using a sample of dividend-paying firms, we show that much of the variation in accruals and real activities can be explained by firms' different performance trajectories. High (low) performance firms spend more (less) on SGA firms that appear to manage earnings to a greater extent change their dividends by larger amounts; and standard earnings management metrics are unimportant in explaining changes in firm value around dividend change announcements. These results are consistent with the notion that applying standard earnings management metrics without taking performance into account can result in researchers mistaking managers' efforts to increase firm value by reporting smoother streams of earnings and dividends over time with evidence of earnings manipulation.

Informed Options Trading Prior to Dividend Change Announcements

AbstractThis paper investigates the information content of options trading prior to dividend change announcements. I find a positive (negative) relation between pre‐announcement abnormal implied volatility (IV) spread (abnormal IV skew) and cumulative abnormal stock returns around dividend change announcements. The predictive power of informed options trading is stronger for announcements of dividend reduction and when the options market is more liquid relative to the stock market and weaker when information has already been incorporated in the stock market. The predictability of informed options trading is robust to a placebo test and alternative measures of informed options trading. Overall results suggest that informed options trading predicts dividend change announcement returns.

Corporate Bond Price Reactions to Dividend Changes

Employing an event study approach, we examine 5,574 bond return reactions to unexpected quarterly dividend change announcements in the U.S. corporate bond market over the period 2002–2014. Overall, we report a significant bond price reaction in the same direction as dividend changes, which supports the hypothesis that dividend changes signal future firm performance. We also find that the bond return reaction is more pronounced if the dividends are reduced than if they are increased. We document a wealth transfer effect when riskier bonds are issued by firms with a low cash ratio and are approaching maturity. These results still hold after we control for the financial crisis and dividend covenants and when we use alternative variables to capture the dividend surprise.

Are Friday announcements special? Overcoming selection bias

We report reduced market response to Friday announcements of dividend changes, seasoned equity offerings, share repurchases, earnings, and mergers, which is seemingly consistent with the notion of investor inattention on Fridays. However, we show that these findings are an outcome of selection bias. Firms that make announcements on Fridays experience reduced market response on any weekday and have common unobserved characteristics across announcement types. After correcting for selection bias, there is no evidence that investors pay less attention to announcements made on Fridays. The method introduced here is applicable to other studies in which an exogenous factor influencing firm performance can actually be associated with firm characteristics.

Core Earnings Uncertainty, Dividend Change Announcements and the Reduction of Covariance Component Risks

We present evidence of two systematic market risk implications associated with core earnings news implicit in dividend change announcements: (1) a decline in firm-market correlation intensity, consistent with reduced investor reliance on overall market movements to value shares, and (2) a downward shift in standard deviation of returns, consistent with increased core earnings information precision. Decoupling these two covariance component risk effects is important because they can offset one another at the firm level, masking unique market influences on total systematic risk. Each is influenced by the information environment in different ways and each is shown to incrementally explain returns in a manner consistent with the capital asset pricing model (CAPM).

The response of stock prices to dividend news on the Ghana stock market: An empirical assessment

An important assumption of the signaling hypothesis is that dividend change announcements are positively correlated with share price reactions and future changes in earnings. However, Miller and Modigliani (1961)sustains that, dividend policy is irrelevant in arriving at a firm value, if the capital market is perfect. The purpose of this paper is to assess the potency of the dividend irrelevance theory on the Ghana stock market by using the Johansen-Juselius cointegration methodology on daily data of dividends, earnings and stock prices from January 2011 to December 2013. The results establish that equity prices in Ghana are not in sync with dividend announcements. However, the incorporation of earnings in the cointegration model provides varying result. The findings indicate that equity price change movements in Ghana are not responsive to dividend news.

English

This study examines the implications of changes in dividends in the market of Kingdom of Saudi Arabia (KSA). First, the research analyzes changes in dividends within the context of signaling hypothesis. Second, this study examines another aspect of signaling hypothesis by testing the abilities of dividends to predict future earnings and cash flows of Saudi firms. Financial economists have explored various aspects of changes in dividends and earnings for well developed markets such as markets of North America and Europe. The objective of this study is to see how the signaling hypothesis manifests itself in a small market, such as KSA, characterized by concentrated family-ownerships, non-taxability of dividends, and high degree of information asymmetry. Signaling hypothesis, initially formulated by Miller and Modigliani (1961), suggests that dividend changes convey material information and that share prices react positively to the announcements of dividend changes. Signaling hypothesis was further generalized to include other factors such as the information content of earnings announcements. Further development of the signaling hypothesis includes the association between dividend and earnings changes and future cash flows of the firms. In this context, we hypothesize that there is a positive relationship between dividend announcement and stock prices in the Saudi market. This study tests this hypothesis using all publicly traded firms listed on the Saudi Exchange Market (Tadawul). We use event study to test stock market responses to dividend announcements. To test the signaling hypothesis we used our cross section data to calculate accumulated average abnormal returns using 100 days as estimation period and 21 days as window period. We used parametric CAAR t test) and non-parametric (G sign) significance tests to verify that our results are significant and not due to pure chance. Our results show no significant reaction of prices to the dividend announcements, which means that signaling hypothesis cannot be generalized to all types of markets and that each market own characteristics have significant effect on the applicability of the signaling hypothesis. Further research is suggested to include earnings in the analysis.

FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE

According the dividend signalling hypothesis, it is expected a positive relationship between dividend change announcements and the subsequent share price reactions. However, empirical results are not consensual. This study investigates whether firm-specific factors contribute to explain a negative market reaction to dividend change announcements, contributing to the scarce analysis of firm-specific factors explaining the inverse share price reaction to dividend change announcements. The study applies the panel data approach to three European markets. The results show that the market reaction to dividend change announcements is negatively associated with the firm size. We find that the negative market reaction to dividend increase announcements is associated with firms that have, on average, lower dividend changes and higher growth opportunities. Moreover, the results suggest that a high percentage of dividend negative changes, decreases the likelihood that the market reacts positively to a dividend decrease announcement. Globally, we find some evidence for the dividend signalling hypothesis.

The Impact of Dividend Omission Announcement on Market Price of Manufacturing Companies: A Study on Dhaka Stock Exchange (DSE)

The dividend policy is one of the most debated topics in the finance literature. According to the dividend signaling hypothesis, dividend change announcements trigger share returns because they convey information about firm's future prospect. This paper focuses on the empirical analysis of the dividend signaling hypothesis and investigates the announcement effect of dividend changes. The study aims to examine the stock return behavior around the dividend announcement in Dhaka Stock Exchange. The event study methodology is used for this study. The abnormal return and cumulative abnormal return are calculated with market adjusted model. The event window is 30 days. The abnormal return and cumulative abnormal return are evaluated for significance using t-test. The findings of the study reveal that the reaction of stock prices to dividend omission announcement is statistically significant. The evidence tends to support the dividend signaling hypothesis that the bad news message affects the market negatively.

Dividend announcement on share prices in a bull and a bear market phase

The information content of dividend hypothesis has been a controversial debate for a number of decades. This research therefore examines the validity of information content of dividend hypothesis and the reaction of share prices to dividend change announcements that contradict the market phase. That is, observing the reaction of the market to the announcements of dividend decrease (increase) when the market is in a bull (bear) market phase. This is because a bull market is generally characterized by persistent increase in share prices, higher financial wellbeing and strong investor interest. While the bear market on the other hand, is seen as the opposite of the bull market cycle. Using the OLS method of regression and the market model, it was observed that investors have a higher expectation with respect to their investments (in terms of dividends) when the market is in a bull phase and vice-versa in the case of the bear market. The results of this research give a strong backing for the information content of dividend hypothesis as it was discovered that dividend change announcements are positively related to share prices. That is, investors earn abnormal returns around dividend change announcement day especially those that contradict the market phase. The findings of this study also show that investors have similar investment behaviour across different financial markets even in a contradicting bull and bear market phase. Key words: Dividend announcement, share prices, bull and bear market.