Dividend Initiations, Information Content and Informed Trading in the Options Market

48 Pages Posted: 12 Oct 2015 Last revised: 18 Jan 2016

See all articles by Balasingham Balachandran

Balasingham Balachandran

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Michael Theobald

University of Birmingham - Department of Accounting and Finance

Yun (Tracy) Zhou

Dept. of Economics and Finance, La Trobe University

Date Written: November 24, 2015

Abstract

We find that informed trading in the option market prior to dividend initiation is negatively related to announcement period price reactions. This relation is more prevalent among firms with abnormal trading in call options, higher stock price runup, and higher option liquidity. We also find improvements in stock liquidity following dividend initiation. The improvement in stock liquidity is positively related to the increase in institutional investors’ holdings, and negatively related to the relative size of the dividend initiation payment and preannouncement option trading. We further find positive abnormal earnings following dividend initiation. Overall, these findings indicate that dividend initiation conveys information regarding sustainable future earnings and improvements in liquidity, and informed traders are active in the option market prior to dividend initiation.

Keywords: Dividend initiations, options trading, O/S, call/put options, volatility surface, abnormal earnings, stock liquidity

JEL Classification: G12, G13, G14, G32

Suggested Citation

Balachandran, Balasingham and Duong, Huu Nhan and Theobald, Michael F. and Zhou, Yun (Tracy), Dividend Initiations, Information Content and Informed Trading in the Options Market (November 24, 2015). 2016 Financial Markets and Corporate Governance. Available at SSRN: https://ssrn.com/abstract=2671121 or http://dx.doi.org/10.2139/ssrn.2671121

Balasingham Balachandran (Contact Author)

La Trobe University - School of Economics and Finance ( email )

La Trobe University
Bundoora, Vic, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Michael F. Theobald

University of Birmingham - Department of Accounting and Finance ( email )

Birmingham B15 2TT
United Kingdom
0121 414 6678 (Fax)

Yun (Tracy) Zhou

Dept. of Economics and Finance, La Trobe University ( email )

Bundoora
Bundoora, Victoria 3083 3086
Australia

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