Information Flow and Liquidity Around Anticipated and Unanticipated Dividend Announcements
John R. Graham
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
Jennifer L. Koski
University of Washington - Michael G. Foster School of Business
University of Utah - Department of Finance
June 26, 2003
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.
Number of Pages in PDF File: 51
Keywords: dividends, news releases, announcements, stock price reactions, stock returns, information flow, scheduled, unscheduled, anticipated, unanticipated
JEL Classification: G14, G35working papers series
Date posted: June 29, 2003
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