NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

Roni Michaely, Richard H. Thaler, Kent Womack

NBER Working Paper No. 4778
Issued in June 1994
NBER Program(s):   AP

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.

download in pdf format
   (1663 K)

download in djvu format
   (592 K)

email paper

This paper is available as PDF (1663 K) or DjVu (592 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4778

Published: Journal of Finance, June 1995. citation courtesy of

Users who downloaded this paper also downloaded these:
Lamont and Thaler w8302 Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs
Bondt and Thaler w4777 Financial Decision-Making in Markets and Firms: A Behavioral Perspective
Malmendier and Shanthikumar w13124 Do Security Analysts Speak in Two Tongues?
Mullainathan and Thaler w7948 Behavioral Economics
Kane, Lee, and Marcus w1248 Earnings and Dividend Announcements is there a Corroboration Effect?
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us