Dividend Increases and Initiations and Default Risk in Equity Returns

Posted: 14 Aug 2010

See all articles by Andreas Charitou

Andreas Charitou

University of Cyprus

Neophytos Lambertides

Cyprus University of Technology

Giorgos Theodoulou

affiliation not provided to SSRN

Date Written: August 12, 2010

Abstract

This study extends the Grullon, Michaely and Swaminathan (2002) analysis by incorporating default risk. Using data for firms that either increased or initiated cash dividend payments during the 23-year period 1986-2008, we find reduction in default risk. This reduction is shown to be a priced risk factor beyond the Fama and French (1993) risk measures, and that it explains the dividend payment decision and the positive market reaction around dividend increases and initiations. Further analysis reveals that the reduction in default risk is a significant factor in explaining the three-year excess returns following dividend increases and initiations.

Keywords: Payout policy, dividend increases, dividend initiations, default risk, option pricing

JEL Classification: G12, G13, G14, G32, G35

Suggested Citation

Charitou, Andreas and Lambertides, Neophytos and Theodoulou, Giorgos, Dividend Increases and Initiations and Default Risk in Equity Returns (August 12, 2010). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1657864

Andreas Charitou (Contact Author)

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893624 (Phone)
+357 2 895030 (Fax)

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Giorgos Theodoulou

affiliation not provided to SSRN ( email )

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