Dividend Announcements Research Articles

Do Dividend Clienteles Exist? Evidence on Dividend Preferences of Retail Investors

We study stock holdings and trading behavior of more than 60,000 households and find evidence consistent with dividend clienteles. Retail investor stock holdings indicate a preference for dividend yield that increases with age and decreases with income, consistent with age and tax clienteles, respectively. Trading patterns reinforce this evidence: Older, low-income investors disproportionally purchase stocks before the ex-dividend day. Furthermore, among small stocks, the ex-day price drop decreases with age and increases with income, consistent with clientele effects. Finally, consistent with the behavioral attention hypothesis, we document that older and low-income investors purchase stocks following dividend announcements.

Capital Market Efficiency and the Effects of Dividend Announcements on Share Prices in Nigeria

Abstract: An efficient market is one in which prices fully reflect available information. An implication of an efficient market is that no excess returns can be made from this information because current prices already reflect the information. However, excess returns (if any) should not be statistically significant from zero (Fox and Opong, 1999). The overall aim of this study is to test if the Nigerian stock market efficiently reacts to dividend announcements in price adjustments. This study extends and improves on previous studies by assessing the speed with which share prices adjust to the information contained in dividend announcements using daily data on the Nigerian stock market. The total number of announcements examined in the Notice to Dealing Members’ File of the Nigerian Stock Exchange from 1991 to 1999 totalled 990. The study covered only 595 cases of annual dividend announcements during this period. To determine the short‐run reactions to dividend, the author calculated market adjusted buy‐and‐hold returns for the samples for the three‐day event period (that is from the day before the announcements to the day after), for the 21‐day and 61‐day event windows. The results revealed that there were excess returns and the cumulative excess returns were significant for 30 days before and until 25 days after dividend announcements for dividend paying firms. It points to the fact that the Nigerian stock market is not semi‐strong efficient.Résumé: Un marché est efficient si les prix actuels reflètent toute l’information publique disponible. Un marché efficient suppose que cette information ne peut être exploitée pour réaliser des gains, parce que les prix actuels la reflètent déjà. Dans le cas où des gains peuvent être réaliser, ils ne peuvent en aucune façon être sensiblement supérieurs à zéro, d’un point de vue statistique (Fox et Opong [1999]). La présente étude a pour objectif global de vérifier si la Bourse des valeurs nigériane est suffisamment réceptive aux déclarations de dividende, lors de l’ajustement du cours d’une action. Elle vient compléter et améliorer des études antérieures sur cette question, en évaluant la vitesse à laquelle le cours d’une action s’adapte aux informations contenues dans des déclarations de dividende qui utilisent les données publiées quotidiennement sur le marché boursier nigérian. Quelque 990 déclarations figurant dans des avis de dividende émis entre 1991 et 1999, et classés dans les dossiers des courtiers membres de la Bourse des valeurs nigériane, ont été examinés au total. L’étude ne porte que sur 595 déclarations annuelles de dividende effectuées durant cette période. Pour déterminer la réceptivitéà court terme du marché boursier nigérian à l’égard de ces 595 déclarations de dividende, l’auteur a calculé‐ sur une période de trois jours (allant de la veille au lendemain du jour où les déclarations ont été effectuées ‐ les revenus ajustés des actions reliées au marché immobilier, achetées et mises en sauvegarde, pour les guichets à 31 et 61 jours. Il en conclut que le revenu des actions est largement excédentaire et l’excédent cumulatif sensiblement élevé 30 jours avant et jusqu’à 25 jours après que les entreprises versant des dividendes ont fait des déclarations y afférentes. Cela montre que le marché boursier nigérian n’est pas efficient selon la forme semi‐forte.

The Initial Impact of the 2003 Reduction in the Dividend Tax Rate

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces the maximum statutory personal tax rate on dividends from 38.1 percent to 15 percent. This study analyzes dividend declarations in the quarters surrounding passage. We find dramatic increases in regular dividends and special dividends after enactment and a decline in share repurchases. We find some evidence that the firms changing their distribution patterns are owned disproportionately by insiders. This finding is consistent with manager-owners modifying the firm's dividend policy to reflect the new tax-advantaged status of dividend income for individual investors.

Dividend Change, Institutional Ownership and Shareholder Wealth

I test whether taxes affect shareholder wealth around dividend change announcements. I control for the magnitude of the dividend tax penalty and the identity of a tax advantaged investor, proxied for by the level of institutional ownership. Consistent with my argument, I find that 1) a dividend tax penalty erodes the positive wealth effect of dividend; 2) the presence of a tax advantaged marginal investor mitigates the negative dividend tax effect. My results offer evidence that shareholder level taxes impact asset prices. I contribute to the literature by separating the dividend tax effect from its information effect.

UK interim and final dividend reductions: a note on price reaction

Price reactions to interim and final dividend reductions are found to be significantly negative and stronger for interim dividend reductions. Although the market reacted negatively around final dividend reduction announcements it bounced back to its prior level within one month of the announcements. The magnitude of price reactions to dividend reductions is found to be statistically related to the size of the dividend reduction, the post-announcement effect from day 2 to day 20, the pre-announcement effect from day −20 to day −2, the gearing ratio and the dummy variable interim versus final dividend reduction.

Information Flow and Liquidity Around Anticipated and Unanticipated Dividend Announcements

We compare changes in information flow and liquidity around anticipated and unanticipated dividend announcements. When the timing of the news announcement can be anticipated in advance, traditional market microstructure models predict that liquidity will deteriorate before the announcement and return to normal after the announcement. Our empirical results generally confirm these predictions and show that the return to normal happens fairly rapidly. The time required to return to normal increases in the information content of the news announcement. In a separate sample of surprise dividend announcements (i.e., initiations, the timing of which is not publicly known in advance), our empirical analysis detects abnormal volume, but no change in liquidity prior to the news release. If informed trading occurs before these unanticipated events, it is apparently not detected by market-makers. After the unanticipated dividend announcements, we find that liquidity is low and volume and volatility are high for a short period - but this uncertainty appears to be resolved relatively quickly. We also find that informational asymmetry and price impact decline following dividend initiations. By contrasting market microstructure for anticipated and unanticipated events, we find results that are generally consistent with microstructure theory that models news announcements as uncertainty-reducing events. We find less evidence that news announcements increase uncertainty by introducing new information that informed traders have an advantage interpreting. The main take-away from our analysis is that market reactions before and after information events differ depending on whether the timing of the event known in advance, implying that researchers should consider whether event timing is ex ante known when studying news announcements.

Transfer Informasi Intra Industri di Sekitar Pengumuman Dividen

Investors in companies in the same industry as the announcing firm do extrapolate information from the announcement to make inferences about industry-wide economic prospects. The purpose of this study is to examine empirically transfer information intra-industry around reporter’s dividend changes announcement that is indicated by abnormal return of nonreporter firm. This study used sample of 90 nonreporter for dividend decreased and 82 nonreporter for dividend increased during 1994-1996 time periods. The statistic methods used to test hypothesis are t-test and multiple regression analysis. The result of the study shows that dividend change announcement having informational value for other firms in the same industry as dividend reporter. Further, there is competitive effect for dividend-decreased announcement. That is dividend decreased reporter is reacted positively by nonreporter. While for dividend-increased announcement, there is contagion effect. Nonreporter react positively or the same direction as the reporter’s reaction. Another finding show that the magnitude of dividend change, size of nonreporter firm couldn’t explain the magnitude of the transfer information.

Event-related GARCH: the impact of stock dividends in Turkey

Cash dividends and rights issues on the Istanbul Stock Exchange are commonly accompanied by large stock dividend payments. This paper tests the proposition that stock dividends have no effect on company value, using a novel GARCH process with event-related intercept terms to capture induced changes in the volatility of stock prices. Returns rise in advance of stock dividend payments, but this effect becomes statistically insignificant when proper allowance is made for heteroscedasticity. Volatility rises after stock dividend payments, and this is attributed to persistence following exceptionally large price movements around the ex dividend day, rather than to any transitory rise in the unconditional returns variance. The study does document some irrationality in responses to cash dividends, with prices rising/ falling after increased/ decreased dividend payments, rather than after the much earlier dividend announcements.

Discussion—Reactions to Dividend Changes Conditional on Earnings Quality

Corporate disclosures are an important source of information for investors. Many studies have documented strong price reactions to earnings, dividends, and other corporate announcements. For dividend announcements, the price implications appear straightforward: price is the present value of expected future dividends. Hence, to the extent that future dividends are related to current dividends, dividend changes should trigger price responses. Other corporate disclosures, such as earnings, may also be viewed as proxies for future dividends. The price reaction to a particular disclosure should increase in the difference between the implied equity value based on that disclosure and price prior to the disclosure. The magnitude of price reaction should also increase in the precision of the disclosure and decrease in the precision of all prior price-related information (see, e.g., Holthausen and Verrecchia [1988]). Mikhail, Walther, and Willis (2003, MWW) test this precision effect focusing on dividend disclosures and using “earnings quality” (the association between future cash flow and past earnings) as a proxy for the precision of prior information. In particular, MWW test whether the magnitude of price reactions to dividend change announcements is negatively related to earnings quality. They also use revisions in analysts’ earnings forecasts as an alternative proxy for the change in expected cash flows triggered by the dividend change announcement. For dividend increases, MWW find that the magnitudes of both price reactions and revisions in analysts’ earnings forecasts are negatively related to earnings quality. For dividend decreases, however, they find insignificant results. The hypothesis that MWW test is simple, intuitive, and well established in the analytical literature. Their focus on dividend change announcements is also justified. Analytically, dividends are linked directly to stock prices, and empirically, dividend changes appear to convey relevant information to investors, as is evident by the significant price reactions (e.g., Aharony and Swary [1980]; Asquith and Mullins [1983]) and by the change in expected future earnings (e.g., Ofer and Siegel [1987]; Nissim and Ziv [2001]). Therefore, the research question is relevant. As discussed below, however, I have some concerns regarding the analysis, pri-

Reactions to Dividend Changes Conditional on Earnings Quality

We investigate if market participants' reactions to dividend changes are related to “earnings quality,” defined as the extent to which a firm's past earnings are associated with its future cash flows. Consistent with predictions from analytical work (Holthausen and Verrecchia [1988]; Kim and Verrecchia [1991]), we find that, controlling for the firm's dividend change, information environment, investment opportunity set, operating risk, and dividend clienteles, the market reacts less to dividend increase announcements from firms with greater earnings quality. Controlling for the firm's dividend change, information environment, and the release of other information around the dividend declaration date, we also document that analyst forecast revisions are significantly lower for firms with higher earnings quality following dividend increases. In both the market reaction and analyst forecast revision tests, our results for dividend decreases are generally not statistically significant.

Dividend policy, cash flow, and investment in Japan

This study provides evidence in support of the cash flow information (CFI) hypothesis focusing on the Japanese firms. Dividend changes indeed convey information about the firm's cash flows. Although the free cash flow hypothesis is to some degree supported by the evidence in firms' investment behavior, dividend policy is not used by Japanese firms to control the overinvestment problem. In addition, the dividend clientele effect does not appear significant around dividend announcements in Japan. Given the specific institutional features of the Japanese market, we find that investment spending is very sensitive to liquidity constraints for nonkeiretsu firms, but not so for keiretsu firms.

Empirical Corporate Finance: Volumes I, II, III and IV

To most economist's the words ‘empirical corporate finance' conjure up memories of countless papers either testing the empirical relevance of the Modigliani and Miller theorem or analysing the impact of corporate events on shares' evaluations. This is no longer true. Nowadays, empirical corporate finance (and corporate finance, for that matter) is a very exciting research area where the focus has shifted towards the study of the relationships among the several agents involved in the life of a company (shareholders, bondholders, managers and so on) and the impact of these relationships on its performance. The ‘mantra' today is ‘information': financial economists have now acknowledged that asymmetric information is pervasive in every aspect of a company's life. Shareholders and other outsiders to the firm do not have complete information on whether investment opportunities are really value‐enhancing; in turn, managers can exploit this asymmetric information to divert resources for their own advantage. Because of these informational problems, common events in the life of a company (like debt issuance or dividends announcements) are now perceived as the main conveyors of information about a company available to outsiders. All this has redefined the research agenda for corporate finance in such a manner as to strongly increase its appeal to mainstream economists.

Are stock dividends (MUSHOs) melons or lemons in Japan?

Whether stock dividends are favorable or unfavorable has been a topic of debate for many years. With real transaction costs involved and without a real effect on the firms' value, stock dividends are often described as “lemons”. When the announcements of stock dividends are associated with increases in future cash dividends, they are perceived favorably as “melons”. Given the dividend payout practice in Japan, the market, on average, reacts positively to Musho-koufu (MUSHO) announcements. Moreover, the market reaction is greater for MUSHOs with higher distribution ratios. Further analysis indicates that MUSHOs of higher distribution ratios are associated with greater increase in dividend payments in the future years than MUSHOs of smaller ratios. However, MUSHOs may not be as good as they appear on average. The three-day cumulative abnormal returns around announcement day range from −12.90% to 28.37%. In addition, among all the MUSHO announcements, about 38.6% incur a negative market reaction. Obviously, some MUSHOs are not perceived favorably by the market. In general, we offer some clues as to which stock dividends are more likely to be favorably or unfavorably perceived. MUSHOs with a higher distribution ratio and an increase in investment are more favorably perceived by the market. MUSHOs by firms that belong to keiretsu groups are also regarded favorably.

Quality of Information and Volatility Around Earnings Announcements

On the basis of theoretical work of Kim and Verrecchia (1991a, 1997), this paper investigates the association between volatility around earnings and dividend announcements and the amount of pre-announcement information and the precision of the announced news for a sample of 212 firms drawn from the London Stock Exchange for the period January 1990 to December 1998. The aforementioned theory suggest that the variance of price change around announcement periods is decreasing in the amount of pre-announcement information but increasing in the precision of the disclosed news. The volatility of stock returns in the event window, natural logarithm of the average market value of a firm over the sample period, and the surrogate of precision derived from analytical work of KV (1991a) are assumed to be the operational measures for the variance of price change around announcement periods, the amount of pre-announcement information, and the precision of the announced news respectively. Tests are conducted using both GJR-GARCH (1,1) and the absolute return measure of volatility. After controlling for the magnitude of the average change of earnings per share, the net change in the degree of leverage, and the level of stock market volatility around firm specific news, the following conclusions emerge. First, it is documented that the volatility of stock returns around announcement periods is negatively related to the amount of pre-announcement information. Consistent with Grant (1980), this finding suggests that (small) firms with relatively less pre-announcement information experience high levels of uncertainty before announcement. This high pre-release uncertainty causes analysts and market participants to disagree about the implications of the forthcoming earnings and dividends announcements. When the announcement becomes imminent it tends to contain a lot of surprises that are translated into higher announcement period volatility. Second, it is found that the precision of the disclosed news plays a significant and important role in explaining shifts in volatility around event windows. In more specific terms, the volatility of stock returns around announcement periods is found to be directly proportional to the precision of the information released. Thus, the precision of an announcement is likely to influence investors' trading decisions around future earnings and dividends announcement dates. The primary conclusions of this paper are robust to the announcement of good or bad news, and remain qualitatively unchanged under a number of alternative assumptions about the way we estimate announcement period volatility. To the extent that the surrogates used for the quality of the predisclosure information and the precision of the news disclosed are appropriate operational measures of the unobservable theoretical constructs of precision implied by Kim and Verrecchia (1991a, 1997) analytical work, the evidence presented here is consistent with their theoretical predictions.

The Information Content of Concurrently Announced Earnings, Cash Dividends, and Stock Dividends: An Investigation of the Chinese Stock Market

The firms listed on China’s stock market are less than ten years old and to date there has been relatively little research on the usefulness of their accounting disclosures for investors. This study focuses on the information content of annual earnings and dividend announcements made by listed Chinese companies. Earnings, cash dividends, and stock dividends are announced concurrently in China and so this allows for tests of their information usefulness and of the interactions between the three signals. Based on a data set of up to 1,232 announcements, we find that unexpected earnings, proxied by earnings changes, are positively related to abnormal returns. Thus, earnings are used by investors in setting market prices. Stock dividends corroborate or attenuate the earnings signal. If the sign of the unexpected stock dividend (increase, decrease) is the same as the sign of the unexpected earnings, then the earnings signal is stronger. If the signs are opposite, the earnings signal is weaker. Unexpected cash dividends have little impact on the earnings signal. Stock dividends per se have a small association with stock returns. In contrast, cash dividends have no discernible association with stock returns and this is consistent with dividend irrelevance arguments. Our results are robust across a number of sensitivity tests.

Information content of earnings in an unregulated market: the co-operative cotton mills of Lancashire, 1880–1900

This paper analyses the relationship between earnings and dividend announcements and contemporaneous stock returns. Many previous studies have examined this association, although few address its social and historical context. In late 19th century Lancashire, there was an unusual coincidence of co-operative ownership and the trading of ownership rights on a liquid stock market. Using stock market numbers extracted from the local financial press in conjunction with other relevant archives, this paper examines the usefulness of accounting information provided in circumstances without regulatory duress and where its disclosure was subject to the scrutiny of a well-informed, and socially diverse, shareholding class. Results suggest that employee involvement via ownership rights is likely to improve the information content of accounting reports.

Stock Dividend Announcement Effects in an Imputation Tax Environment

A key question in asset pricing is the extent to which tax effects are passed through market prices or are capitalised in them. New Zealand stock dividends provide a useful window into this debate because of (1) the existence of both taxable and non‐taxable stock dividends, and (2) the particular form of imputation tax system which allows the full pass through of corporate taxes to the investor on the proportion of profits which are distributed either as cash or taxable stock dividends. We present evidence that investors value future tax benefits associated with imputation tax credits.

Prior Information and the Market Reaction to Dividend Changes

We investigate two hypotheses regarding the information content of dividend change announcements. The first is that the “importance” of information signaled by a dividend change depends on the reliability of earnings forecasts existing before the dividend announcement. The second hypothesis is that the stock price reaction to dividend change announcements is related to earnings forecast error as of the time of the dividend announcement. Our results reveal that dividend increases convey more information for firms in which financial analysts least accurately predict earnings. The results also indicate that dividend increase and decrease announcements provide market participants with information which, on average, allows them to differentiate between firms on the basis of future earnings realizations. These differential information effects are shown to be robust to price, size, dividend yield, and overinvestment effects.

Earnings expectations and the relative information content of dividend and earnings announcements

Recent studies of financial analysis' earnings forecast revisions following dividend announcements suggest that dividends convey information regarding a firm's future prospects. In this study, we extend the analysis by explicitly controlling for earnings information released during the forecast revision measurement period. Our results suggest that earnings forecast revisions previously attributed to dividend announcements are driven primarily by earnings surprise. At best, dividends appear to serve a corroborative role.

Conditional event studies, anticipation, and asymmetric information: the case of seasoned equity issues and pre-issue information releases

Information disclosed before equity issue announcements could reduce the price drops at the announcements by (1) reducing uncertainty about managers' private information, and/or (2) helping investors to anticipate the equity issues. To distinguish between these effects, we examine the determinants of firms' decisions to issue equity, and develop a conditional event-study procedure, based on Acharya [Acharya, S., 1988, A generalized econometric model and tests of a signaling hypothesis with two discrete signals, Journal of Finance, 43, 413–429.], that distinguishes between anticipation and asymmetric information. After controlling for differences in uncertainty across firms, we present evidence that stock split declarations, dividend announcements and earnings releases help investors to anticipate equity issues, but do not reduce asymmetric information.