Vanishing Stock Dividends
49 Pages Posted: 27 Jan 2016 Last revised: 7 Mar 2019
Date Written: March 06, 2019
The distribution of stock dividends is costly to stockholders of levered firms. Since 1953, firms have to reduce retained earnings by the market value of the distributed stocks. This provides extra protection to bondholders at stockholders expense. We show that, in addition, the informational content of stock dividends is negative. We find a drastic reduction in ROA and ROE following distribution of stock dividends. Yet, surprisingly, stockholders seem to like them. Consistent with past studies, controlling for contemporaneous cash dividends and earnings announcements, we document positive and significant announcement returns for the 1954-2017 period. However, we show that the announcement returns become economically small and statistically insignificant since 2008. We also find a time series decay in the announcement effects of a given firm. Experienced stockholders learn and greet the firm's repetitive distributions with reduced enthusiasm. Firms respond and over the 1954-2017 period drastically reduced the frequency of stock dividends until they essentially vanished. The paper demonstrates that increased investors' sophistication causally reduced the propensity of firms to distribute stock dividends up to their essential elimination.
Keywords: stock dividends, investor learning, signaling
JEL Classification: G35
Suggested Citation: Suggested Citation