Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

45 Pages Posted: 1 Jul 2003  

Roni Michaely

Johnson@Cornell Tech, Cornell University

Richard H. Thaler

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Kent L. Womack

University of Toronto - Rotman School of Management (Deceased)

Multiple version iconThere are 2 versions of this paper

Date Written: June 1994

Abstract

Initiations and omissions of dividend payments are important changes in corporate financial policy. This paper investigates the market reaction to such changes in terms of prices, volume, and changes in clientele. Consistent with the prior literature we find that short run price reactions to omissions are greater than for initiations (-7.0% vs. +3.4% three day return). However, we show that, when we control for the change in the magnitude of dividend yield (which is larger for omissions), the asymmetry shrinks or disappears, depending on the specification. In the 12 months after the announcement (excluding the event calendar month), there is a significant positive market-adjusted return for firms initiating dividends of +7.5% and a significant negative market-adjusted return for firms omitting dividends of -11.0%. However, the post dividend omission drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples (long in initiation stocks and short in omission stocks) earns positive returns in 22 out of 25 years. Although these changes in dividend policy might be expected to produce shifts in clientele, we find little evidence for such a shift. Volume increases, but only slightly and briefly, and there are no important changes in institutional ownership.

Suggested Citation

Michaely, Roni and Thaler, Richard H. and Womack, Kent L., Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift? (June 1994). NBER Working Paper No. w4778. Available at SSRN: https://ssrn.com/abstract=420313

Roni Michaely

Johnson@Cornell Tech, Cornell University ( email )

111 8th Avenue #302
New York, NY 10011
United States

Richard H. Thaler (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-702-5208 (Phone)
773-702-0458 (Fax)

Kent L. Womack

University of Toronto - Rotman School of Management (Deceased)

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