Vanishing Stock Dividends

49 Pages Posted: 27 Jan 2016 Last revised: 7 Mar 2019

See all articles by Avner Kalay

Avner Kalay

Tel Aviv University - Faculty of Management; University of Utah - David Eccles School of Business

Feng Zhang

University of Utah - Department of Finance

Date Written: March 06, 2019

Abstract

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

Kalay, Avner and Zhang, Feng, Vanishing Stock Dividends (March 06, 2019). Available at SSRN: https://ssrn.com/abstract=2722115 or http://dx.doi.org/10.2139/ssrn.2722115

Avner Kalay

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
972 3 6406298 (Phone)
972 3 6406330 (Fax)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801-581-5457 (Phone)

Feng Zhang (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112-9303
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
153
Abstract Views
733
rank
191,307
PlumX Metrics