Dividend Initiation Announcements Research Articles

Information Content of Options Trading Prior to Dividend Initiations

This article utilizes options markets to determine the information content of dividend initiation announcements. Pre-event informed options trading, measured by abnormal implied volatility spread and skew, predicts the cumulative abnormal returns around dividend initiation announcements. Options trading is more informative on dividend initiation announcement returns when the options market is more liquid, the underlying stock market is less informed, and the dividend initiations are of a greater surprise to the market. The results are robust to a randomization test and support the conclusion that pre-event options trading contains information about the market reaction to dividend initiation announcements. TOPICS:Derivatives, options, legal/regulatory/public policy, information providers/credit ratings Key Findings • The information content of options trading is stronger when the options market is more liquid relative to the underlying stock market. • The information content of options trading is higher when the dividend initiating firms have relatively lower pre-initiation cash flows. • The predictive power of informed options trading is weaker when the underlying stock market is subject to more informed trading.

Local clientele: geography and comovement of stock returns

PurposeLocal investors have the ability to impact the stock prices and returns of local firms. However, the impact of news made by a firm on local investors and neighboring companies is absent from the academic literature. The purpose of this paper is to fill that void and examine how a local investor clientele affects the stock market reactions of firms located within the same geographic proximity as a news-generating firm.Design/methodology/approachAfter accounting for firm, industry, and geographic characteristics, this study examines how a firm’s dividend initiation announcement (positive news) influences stock prices of seemingly unrelated firms within the same metropolitan statistical area (MSA).FindingsDividend-paying firms located in areas with a higher percentage of dividend clientele experience a positive comovement reaction when a seemingly unrelated firm within the same MSA announces a dividend initiation. The positive reactions are specifically for dividend-paying firms, while non-dividend payers exhibit no significant response. These results are robust to numerous regression methods and alternative explanations.Practical implicationsThese findings are consistent with the positive-investor-attention hypothesis, suggesting positive spillover effects from news announcements for other local firms in the presence of individual investor clientele.Originality/valueThis is the first study to link how news generated by one firm can influence other geographically local firms, providing evidence on the impact of individual investor clientele on stock returns of local non-news firms.

Stock Market Reactions to Dividend Announcements: Empirical Evidence From the Singapore Stock Market

The present study investigates the 50 randomly selected companies from Singapore Stock Exchange to assess the impact of the dividend initiation announcement and omission announcement on the share prices of the companies under study. The study has analyzed the impact of dividend initiations announcement on the size of firms by dividing the firms into small and big categories. Further, the relationship between changes in dividend and company’s future earnings is also analyzed. The study finds that the dividend initiation announcement’s impact on the share prices of Singapore companies is trivial and uncertain.

The information content of dividend initiation announcements

PurposeThe purpose of this paper is to examine the dividend initiation announcements made by firms in the information technology sector as defined in a modern system of industrial classification.Design/methodology/approachOn the basis of a modern classification of the information technology industry, the authors examine a wide range of corporate performance and management measures to discriminate between the two theories of the information revealed by the announcement of dividend initiations, the signaling, and life cycle theories.FindingsThe empirical results are more consistent with the corporate life cycle theory of dividends than with the information signaling hypothesis. This finding helps clarify the nature of the information revealed by the announcement.Originality/valueThe paper has clear implications for investors who are interested in the growth prospects of technology firms, or for others interested in their prospective stability and degree of maturity.

Ambiguity, Risk, and Dividend Payout Policy

We study the effect of ambiguity — Knightian uncertainty — on payout policy. We find that firm-level ambiguity increases and accelerates payout, via both dividends and share repurchases. This positive effect of ambiguity is distinct from the known negative effect of risk on payout policy. Ambiguity leads ambiguity-averse investors to overweight the likelihoods of bad outcomes and underweight the likelihoods of good outcomes, so the attractiveness of investment opportunities decreases in ambiguity, which may increase investors’ preferences for cash payout. Consistent with this positive effect of ambiguity on payout, we find that dividend initiation announcement returns increase in ambiguity.

The Effect of Dividend Initiation on Short-run Return in Indonesia: An Event Study with Propensity Score Matching Approach

<p>Dividend initiation policy offers a relatively unique practical and conceptual characteristics compared to those of regular dividend. This study aims at investigating whether initial dividend policy of Indonesian firms affects short-run stock return, while further exploring the implementation of a new event study approach, <em>propensity score matching</em>, as an experimental-like design. This approach is based on actual rather than estimated abnormal return commonly used in traditional approach. Applying this new approach, this study found no significant abnormal returns around dividend initiation announcement by firms listed in Indonesia Stock Exchange. The findings imply that the dividend initiation behavior of Indonesian firms is proved not fully to follow the theoretical framework of signaling model, a dividend model which is basically developed primarily based on regular dividend behavior. The results partly contradict those findings mostly resulted from researchs conducted in advanced market context but seem to support contextuality argument of dividend policy. From methodological perspective, this study identified that the use of propensity score matching approach needs a large number of firms from which control firms are selected, accordingly the study conducted in market with limited number of listed firms such as in Indonesia could generates selection problem of control firms that optimally match treated firms.</p>

Dividend initiations, increases and idiosyncratic volatility

We examine three aspects of the relation between dividend initiation and increase announcements and idiosyncratic volatility. First, consistent with dividend signaling, we find that firms with higher levels of idiosyncratic volatility are associated with higher announcement abnormal returns when initiating or increasing dividends. Second, firms on average experience an ex post reduction in idiosyncratic volatility following dividend initiations that is associated with announcement and long-term abnormal returns. Finally, high idiosyncratic volatility firms are associated with stronger positive post event return drift.

Trading volume reaction around dividend initiation announcements: a corporate governance perspective

The study investigated the relationship between trading volume reaction around first dividends initiation. We use a sample of 546 public US firms that initiated first dividend between 2003 and 2012. Our results show that corporate governance has a significant association with trading volume reaction. These results suggest that that poor governance will increase the trading volume. In contrast, trading volume reaction does not relate to dividend payment, dividend yield and holding period return directly. Taken together our results suggest that poor governance induce investor heterogeneous belief around first dividend initiation. Our paper contributes to the growing literature on the cross sectional determinants of trading volume at the first dividend initiation.

Trading volume reaction around dividend initiation announcements: a corporate governance perspective

The study investigated the relationship between trading volume reaction around first dividends initiation. We use a sample of 546 public US firms that initiated first dividend between 2003 and 2012. Our results show that corporate governance has a significant association with trading volume reaction. These results suggest that that poor governance will increase the trading volume. In contrast, trading volume reaction does not relate to dividend payment, dividend yield and holding period return directly. Taken together our results suggest that poor governance induce investor heterogeneous belief around first dividend initiation. Our paper contributes to the growing literature on the cross sectional determinants of trading volume at the first dividend initiation.

New Perspectives on the Information Content of Dividend Initiation Announcements: The Special Case of Information Technology Firms

This paper examines dividend initiation announcements made by firms in the information technology sector. This sector is the subject of intense investor interest and has long been characterized with hyper growth, high margin, high volatility, and high risk. Also, the corporate life cycle of these firms is different than firms in older, more traditional industries. On the basis of a modern classification of the information technology industry, we examine a wide range of corporate performance and management measures to discriminate between the two theories of the information revealed by the announcement of dividend initiations, the signaling and life cycle theories. Our empirical results are more consistent with the corporate life cycle theory of dividends than with the information signaling hypothesis. This finding helps clarify the nature of the information revealed by the announcement. Moreover, it has clear implications for investors who are interested in the growth prospects of technology firms, or for others interested in their prospective stability and degree of maturity.

Dividend Initiations, Increases and Idiosyncratic Volatility

We examine three aspects of the relation between dividend initiation and increase announcements and idiosyncratic volatility. First, consistent with dividend signaling, we find that firms with higher levels of idiosyncratic volatility are associated with higher announcement abnormal returns when initiating or increasing dividends. Second, high idiosyncratic volatility firms are associated with stronger positive post event return drift. Finally, firms on average experience an ex post reduction in idiosyncratic volatility following dividend initiations that is associated with announcement and long-term abnormal returns.

The long-term performance following dividend initiations and resumptions revisited

Previous studies have documented that an announcement of dividend initiation and resumption is associated with an increase in stock price, while Boehme and Sorescu (J Finance 47:871–900, 2002) argue that the dividend anomaly only occurs by chance. However, their sample contains firms listed within 3 and/or 5 years of their respective initial public offering (IPO) dates, as well as regulated firms. We conjecture that the confounding effects of IPOs and regulated firms may interfere with the increase in stock prices due to dividend initiations and resumptions and bias their results. We thus reexamine the long-term stock performance following dividend initiations and resumptions by excluding newly IPO firms and regulated firms. We find no evidence that the non-robust positive price drifts for firms, which initiate or resume cash dividends, is due to the confounding effects of IPOs and regulated firms. Therefore the price drifts after dividend initiation and resumption announcements may be a sample-specific result of chance, even after controlling for possible sample selection biases.

Overinvestment, corporate governance, and dividend initiations

Firms with low Tobin's Q and high cash flow have significantly more positive dividend initiation announcement returns than do other firms. I interpret this result as consistent with the hypothesis that reductions in the agency costs of overinvestment at firms with poor investment opportunities and ample cash flow are reflected in higher dividend initiation announcement returns. Further tests, such as examining the impact of governance metrics on initiation announcement returns following the dividend tax cut of 2003 and examining the long-run cash-retention policies of dividend-initiating firms, are consistent with this interpretation. There is also some evidence that is consistent with the cash flow signaling hypothesis, as dividend-initiating firms with low Tobin's Q and low pre-initiation cash flow experience substantial revisions in analysts' earnings forecasts and significantly positive initiation announcement returns.

The impact of dividend initiations on Greek listed firms’ wealth and volatility across information environments

PurposeThe purpose of this paper is to investigate the impact of dividend initiations on shareholders’ wealth using a sample of 38 Greek listed firms.Design/methodology/approachThe event study methodology of Brown and Warner was employed to examine the share price reaction to initial dividend announcements across different information environments.FindingsResults show that dividend initiations bring about significant positive abnormal returns in the announcement period. The price response to dividend initiations is inversely associated with the information environment. Finally, the volatility of stock returns is higher in the low information environment group of firms than in the high information environment group of firms.Research limitations/implicationsThe observations are not many, although the whole population is included, since there are no data available prior to 2000.Practical implicationsThese findings are useful to researchers, practitioners and investors who have an interest in firms listed on the Athens Stock Exchange (ASE) for their proper strategic decision making.Originality/valueFor the first time the stock price behaviour of firms listed on the ASE around dividend initiation announcement dates is examined.

Cross‐sectional differences in the profits, returns and risk of firms initiating dividends

Purpose– The purpose of this paper is to examine cross‐sectional differences in the profits, returns and risk of high‐ and low‐market‐to‐book ratios (M/B) stocks before and after the initiation of regular cash dividend payments. Design/methodology/approach– This study uses parametric and non‐parametric statistics and ordinary least squares regression to test for differences in the profits, returns and risk of high‐ and low‐M/B stocks before and after dividend initiation. Findings– Low‐M/B stocks display the most positive price reaction to dividend initiation announcements. High‐M/B firms have larger profits, cash levels and capital expenditure before and at the time of dividend initiation, but more closely resemble the low‐M/B firms in terms of these characteristics within three years following dividend initiation. Excess returns earned by low‐M/B firms are related to decreases in systematic risk, while the returns of high‐M/B firms are related to their higher profitability. Research limitations/implications– Averaging results from 1965‐2000 does not account for possible changes in the information content of dividend initiations over time (as evidenced by steadily declining dividend yields over this period). Practical implications– The findings are consistent with the idea that firms begin paying dividends as they are maturing into a slower growth period, and do not support the idea that dividend initiation signals faster future earnings growth. Originality/value– The analysis adds to the body of knowledge by explicitly conditioning the expectations from various dividend theories based upon individual firms’ growth phase as reflected in their M/B ratios, and suggests that signaling, agency and risk explanations for dividends must be considered jointly with a firm's growth prospects when studying dividend events.

Dividend Increases and Initiations, Debt Policy and Default Risk in Equity Returns

This paper documents that dividend initiations and increases are associated with reductions in default risk (DR). Using a sample of 6,336 U.S. firm-year observations that either increased or initiated cash dividend payments during the 20 year period 1986-2005, we find that DR is significantly reduced the year prior to the dividend increase and initiation announcements, and that this reduction explains the dividend payment decision beyond profitability and the Fama and French (1993) risk measures. Additionally, our results support that the reduction in DR is a priced risk factor. Specifically, we show that a) the dividend initiation and increase firms exhibit a decrease in the DR factor loading by augmenting the Fama-French three-factor model, and b) the reduction in DR significantly explains the positive market reaction upon dividend increases and initiations. Our results also suggest that managers utilising on the reduced default risk, increase total debt in order to increase firm's tax benefits. Finally, further analysis reveals that changes in default risk and changes in debt to equity ratio are significant factors in explaining the three year excess returns following dividend increases and initiations (Michaely et al., 1995; Benartzi et al., 1997; Grullon et al., 2002). The results are robust to further controls for profitability, retained earnings, liquidity, growth, size, special items, and systematic risk.

Overinvestment, Corporate Governance, and Dividend Initiations

Firms with high agency costs of overinvestment have significantly more positive dividend initiation announcement returns than other firms do. This paper presents the results from three experiments consistent with this conclusion: (i) dividend initiation announcement returns are significantly more positive for firms with low Tobin's Q and high cash flow; (ii) following an exogenous event (the dividend tax cut of 2003) which changed the equilibrium tradeoff between hoarding cash and paying it out, firms with weak governance (i.e. those that are more likely to overinvest) have significantly more positive initiation announcement returns; and (iii) firms with low Q significantly reduce their cash hoarding in the years following dividend initiations. Combined, these results are consistent with the hypothesis that initiating dividends reduces the agency costs of free cash flow and that the market reaction to dividend initiation announcements rationally anticipates the lower agency costs of free cash flow or overinvestment.

Dividend Initiations, Analyst Forecasts, and the Cost of Capital

In this paper, I explore the information content of dividends by looking at dividend initiation announcements. While earlier literature has used analyst forecasts to explore the information content of dividends, they have all focused on dividend changes. I show that analysts revise their one-year-ahead (long-run growth) forecasts upwards (downward) one month after the initiation announcement. However, after the fiscal year end in which a firm announced the dividend initiation, both one-year-ahead earnings and long-run earnings growth forecasts are significantly lower than before the firm became a dividend payer. These results suggest dividends are not a signal of good future prospects. Rather, the results indicate that dividend initiations signal that a firm has fewer long-run growth opportunities. They also suggest dividends are a way of reducing the agency problem. I show that the cost of capital decreases significantly one year after the initiation announcement. Thus, it seems that paying dividends helps reduce the agency problem following a decrease in growth opportunities. Finally, my results also suggest that firms do not start paying dividends in order to reduce their cost of capital.

Dividend initiation announcements effects in initial public offerings

This paper examines the market reaction to dividend initiation announcements by Initial Public Offerings (IPOs) in the UK. Using data for 131 Official Listed (OL) and 139 Unlisted Securities Market (USM) firms, covering the period 1982–1991, the study finds a positive market reaction to such announcements. Employing a random walk and random walk with a drift models to generate earnings expectations, the study finds that unexpected earnings are significantly positively related to the announcement day abnormal return, with unexpected dividends positive and significant, for the OL sample only. Contrary to prior research, no evidence of an ‘interaction effect’ between earnings and dividends signals is reported.

Dividend initiations in reverse‐LBO firms

AbstractThis article documents a lack of share price response to dividend initiation announcements by firms that recently completed a reverse‐LBO. We identify a group of firms that had recently completed an IPO and report that they experience a positive reaction to dividend initiation announcements as expected based on the prior dividend initiation literature. We rule out a size‐based explanation for the abnormal response in reverse‐LBOs and offer some potential explanations for our empirical findings.