Dividend Initiations and Information Content - Revisited

Abstract

We examine the operating performance subsequent to dividend initiations by comparing firms with similar pre-event operating performance and growth opportunities. We find significantly positive abnormal operating performance for each year from the year of DI to three years after for dividend initiations in the post-tax cut period, whereas we find only significantly positive abnormal operating performance for the year of and year after for DIs in the pretax cut period, indicating strong (weak) support for the information content hypothesis for the post (pre) tax cut period. We also utilize Cox-proportional hazard regressions and find support for information content in the post-tax cut period. Further, we show that abnormal operating performances are positively related to post announcement long run abnormal returns for both the pre- and post-tax periods, indicating that the information content of dividend initiations regarding future earnings is reflected in the long-term reaction.

Keywords: Dividend initiations, abnormal operating performance, Information content, long term stock returns

JEL Classification: G14, G35