Price Reactions to Dividend Initiations and Omissions: Overreaction Or Drift?, Issue 4778
National Bureau of Economic Research, 1994 - Corporations - 39 pages
Initiations and omissions of dividend payments are important changes in corporate financial policy. This paper investigates the market reaction to such changes in terms of prices, volume, and changes in clientele. Consistent with the prior literature we find that short run price reactions to omissions are greater than for initiations ( -7.0% vs. +3.4% three day return). However, we show that, when we control for the change in the magnitude of dividend yield (which is larger for omissions), the asymmetry shrinks or disappears, depending on the specification. In the 12 months after the announcement (excluding the event calendar month), there is a significant positive market-adjusted return for firms initiating dividends of +7.5% and a significant negative market-adjusted return for firms omitting dividends of -11.0%. However, the post dividend omission drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples (long in initiation stocks and short in omission stocks) earns positive returns in 22 out of 25 years. Although these changes in dividend policy might be expected to produce shifts in clientele, we find little evidence for such a shift. Volume increases, but only slightly and briefly, and there are no important changes in institutional ownership.
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abnormal volume Andrei Shleifer Announcement Date average daily turnover average turnover Bernard and Thomas beta Bondt and Thaler cash dividend change in dividend change in yield clientele shift closed-end funds companies COMPUSTAT concurrent earnings CRSP David H deciles dividend initiation dividend omission dividend policy Dividend Yield earnings announcement earnings surprises entire sample equal weighted index equal-weighted market index equally-weighted market event day F-test Financial Economics holding period relative industry-matched portfolio initiate dividends initiation announcement initiation or omission initiation sample initiations and omissions investigate Journal of Financial market capitalization Market-adjusted returns matching firm mean excess return median month NBER Working Papers NYSE or AMEX NYSE/AMEX omission announcement omission event omission sample omissions and initiations Omitting Dividends omitting firms overreaction Panel positive excess returns price reaction REACTIONS TO DIVIDEND return for firm Richard Thaler Shleifer significant stock dividend Stock Prices subsample subscription T-Stat T-statistics Table trading days Yield change