Sensitivity of Investor Reaction to Market Direction and Volatility: Dividend Change Announcements

Posted: 14 Apr 2004

See all articles by Diane Scott Docking

Diane Scott Docking

Northern Illinois University - Department of Finance

Paul D. Koch

Iowa State University - Finance Department; Iowa State University - Finance Department

Abstract

We examine whether investor reactions are sensitive to the recent direction or volatility of underlying market movements. We find that dividend-change announcements elicit a greater change in stock price when the nature of the news (good or bad) goes against the grain of the recent market direction during volatile times. For example, announcements to lower dividends elicit a significantly greater decrease in stock price when market returns have been up and more volatile. Similarly, announcements to raise dividends tend to elicit a greater increase in stock price when market returns have been normal or down and more volatile, although this latter tendency lacks statistical significance. We suggest an explanation for these results that combines the implications of a dynamic rational expectations equilibrium model with behavioral considerations that link the responsiveness of investors to market direction and volatility.

Keywords: Dividend announcements, rational expectations

JEL Classification: G14, G19

Suggested Citation

Scott Docking, Diane and Koch, Paul D., Sensitivity of Investor Reaction to Market Direction and Volatility: Dividend Change Announcements. Available at SSRN: https://ssrn.com/abstract=529782

Diane Scott Docking (Contact Author)

Northern Illinois University - Department of Finance ( email )

Barsema Hall
DeKalb, IL 60115
United States
(815) 753-6396 (Phone)

Paul D. Koch

Iowa State University - Finance Department

Ivy College of Business
Ames, IA 50011
United States
5152942491 (Phone)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

Iowa State University - Finance Department

Ames, IA 50011-2063
United States
5152942491 (Phone)

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