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Trading Behavior and the Unbiasedness of the Market Reaction to Dividend Announcements

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  • Bajaj, Mukesh
  • Vijh, Anand M

Abstract

This article examines the price formation process during dividend announcement day using daily closing prices and transactions data. The authors find that the unconditional positive excess returns, first documented by A. Kalay and U. Loewenstein (1985), are higher for small-firm and low-priced stocks. Price volatility and trading volume also increase during this period. Examination of trade prices relative to the bid-ask spread and volume of trades at bid and asked prices shows that the excess returns cannot be attributed to measurement errors or to spillover effects of tax-related ex-day trading. Rather, the price behavior is related to the absorption of dividend information. Copyright 1995 by American Finance Association.

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  • Bajaj, Mukesh & Vijh, Anand M, 1995. "Trading Behavior and the Unbiasedness of the Market Reaction to Dividend Announcements," Journal of Finance, American Finance Association, vol. 50(1), pages 255-279, March.
    • Handle: RePEc:bla:jfinan:v:50:y:1995:i:1:p:255-79
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    Cited by:

    1. Louis T. W. Cheng & T. Y. Leung, 2008. "Is there information content from insider trading activities preceding earnings and dividend announcements in Hong Kong?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(3), pages 417-437, September.
    2. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    3. Ravi Dhar & William Goetzmann & Ning Zhu & EFA Moscow, 2004. "The Impact of Clientele Changes: Evidence from Stock Splits," Yale School of Management Working Papers ysm369, Yale School of Management, revised 01 Sep 2009.
    4. Margaret Lamb & Andrew Lymer, 1999. "Taxation research in an accounting context: future prospects and interdisciplinary perspectives," European Accounting Review, Taylor & Francis Journals, vol. 8(4), pages 749-776.
    5. Louis Cheng & Hung-Gay Fung & Tak Leung, 2007. "Information effects of dividends: Evidence from the Hong Kong market," Review of Quantitative Finance and Accounting, Springer, vol. 28(1), pages 23-54, January.
    6. Wei Hao & Udomsak Wongchoti & Martin Young & Jianguo Chen, 2021. "R2 and the corporate signaling effect," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1353-1381, December.
    7. Sadaf Anwar & Shveta Singh & P. K. Jain, 2017. "Impact of Cash Dividend Announcements: Evidence from the Indian Manufacturing Companies," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 16(1), pages 29-60, April.
    8. Al-Yahyaee, Khamis H. & Pham, Toan M. & Walter, Terry S., 2011. "The information content of cash dividend announcements in a unique environment," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 606-612, March.
    9. Chen, Zhijuan & Lin, William T. & Ma, Changfeng & Tsai, Shih-Chuan, 2014. "Liquidity provisions by individual investor trading prior to dividend announcements: Evidence from Taiwan," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 358-374.
    10. Eva Liljeblom & Sabur Mollah & Patrik Rotter, 2015. "Do dividends signal future earnings in the Nordic stock markets?," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 493-511, April.
    11. Ece C. KARADAGLI & Nazlı C. OMAY, 2012. "Testing Weak Form Market Efficiency Of Emerging Markets: A Nonlinear Approach," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 7(3(21)/ Fa), pages 235-245.
    12. Dan W. French & Paula L. Varson & Kenneth P. Moon, 2005. "Capital Structure and the Ex‐Dividend Day Return," The Financial Review, Eastern Finance Association, vol. 40(3), pages 361-379, August.
    13. Cheng, Louis T.W. & Davidson III, Wallace N. & Leung, T.Y., 2011. "Insider trading returns and dividend signals," International Review of Economics & Finance, Elsevier, vol. 20(3), pages 421-429, June.
    14. Detzel, F. Larry & Weigand, Robert A., 1998. "Explaining Persistence in Mutual Fund Performance," Financial Services Review, Elsevier, vol. 7(1), pages 45-55.
    15. Ravi Dhar & William Goetzmann & Ning Zhu & EFA Moscow, 2004. "The Impact of Clientele Changes: Evidence from Stock Splits," Yale School of Management Working Papers ysm369, Yale School of Management, revised 01 Sep 2009.
    16. Matthias Bank & Ralf Baumann, 2015. "Market efficiency under ad hoc information: evidence from Germany," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 29(3), pages 173-206, August.
    17. Ishmael Radikoko & Emmanuel Ndjadingwe, 2015. "Investigating the Effects of Dividends Pay-out on Stock Prices and Traded Equity Volumes of BSE Listed Firms," International Journal of Innovation and Economic Development, Inovatus Services Ltd., vol. 1(4), pages 24-37, October.
    18. Sabur Mollah, 2007. "Price Reaction To Dividend Initiations And Omissions In Emerging Market: Evidence From Pre And Post Market Crisis In Bangladesh," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 1(2), pages 51-68.
    19. Andrey Kudryavtsev, 2017. "The Effect of Stock Return Sequences on Trading Volumes," IJFS, MDPI, vol. 5(4), pages 1-15, October.
    20. Tomislav Globan & Tihana Skrinjaric, 2020. "Penny wise and pound foolish: capital gains tax and trading volume on the Zagreb Stock Exchange," Public Sector Economics, Institute of Public Finance, vol. 44(3), pages 299-329.

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