A Quasi-Experimental Test of the Risk-Reward Paradigm

49 Pages Posted: 31 Mar 2016 Last revised: 6 Jun 2017

See all articles by Ivo Welch

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2, 2016

Abstract

Do financial markets reward investors for bearing risk? My paper tests this basic paradigm question with a quasi-experimental approach. After a firm has publicly declared a dividend, but in the few days that precede the cum-to-ex date, an investor in the traded equity owns a claim to the dividend cash plus the remaining firm equity within the corporate shell. In the days after the cum-to-ex date, the shell contains only the sans-dividend-cash firm equity. The empirical evidence confirms the predicted increases in volatilities but shows unexpected decreases in average returns. Taxes and trading cannot explain this.

Keywords: Financing, Leverage, Capital Structure, Quasi-Experiments, Behavioral Finance

JEL Classification: G12, G31, G32, G35

Suggested Citation

Welch, Ivo, A Quasi-Experimental Test of the Risk-Reward Paradigm (September 2, 2016). Available at SSRN: https://ssrn.com/abstract=2755337 or http://dx.doi.org/10.2139/ssrn.2755337

Ivo Welch (Contact Author)

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