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|title: ||The phenomenon of the adverse market reaction to dividend change announcements: new Eeidence from Europe|
|authors: ||Vieira, Elisabete F. Simões|
Raposo, Clara C.
|keywords: ||Cash Dividends, Signalling Hypothesis, Adverse Market Reaction|
|issue date: ||2007|
|abstract: ||The dividend policy is one of the most debated topics in the finance literature.
According to the dividend signalling hypothesis, which has motivated a significant
amount of theoretical and empirical research, dividend change announcements trigger
share returns because they convey information about management’s assessment on
firms’ future prospects. Consequently, a dividend increase (decrease) should be
followed by an improvement (reduction) in a firm’s value.
Although there are empirical evidence supporting the positive relationship between
dividend change announcements and the subsequent share price reactions, some studies
have not supported this idea. Furthermore, several studies found evidence of a
significant percentage of cases where share prices reactions are opposite to the dividend
changes direction, like the works of Asquith and Mullins (1983), Benesh, Keown and
Pinkerton (1984), Born, Mozer and Officer (1988), Dhillon and Johnson (1994) Healy,
Hathorn and Kirch (1997), and, more recently, Vieira (2005).
We introduce a new approach to investigate the relationship between the market
reaction to dividend changes and future earnings changes with the purpose of
understanding why the market sometimes reacts negatively (positively) to dividend
increases (decreases). We find only weak evidence for the dividend information content
hypothesis. The Portuguese results suggest that the adverse market reaction to dividendchange announcements is basically due to the fact that the market does not understand
the signal given by firms though dividend change announcements. Moreover, we find
no evidence of the inverse signalling effect, except for the UK market. The results
suggest that the UK market investors have more capability to predict future earnings
than the investors of the Portuguese and the French markets.|
|appears in collections||ISCA - Working paper|
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