When firms announce dividend increases, their stock prices generally increase about 2 percent [see Aharony and Swary (1980)]. Announcements of the initiation of quarterly dividend payouts by firms that previously paid no dividends generate even larger stock price reactions [see Asquith and Mullins (1983), Healy and Palepu (1988), and Michaely, Thaler, and Womack (1995)]. Moreover, stock prices generally experience similar declines when firms announce dividend decreases or omissions, falling about 9.5 percent, on average, at the announcement of an omission [Healy and Palepu (1988)].
Result 19.4 Stock prices increase, on average, when firms increase dividends and decrease, on average, when they decrease dividends.
As a corporate executive, you might interpret a positive stock price reaction to an announced dividend increase as evidence that investors consider the dividend increase to be a good decision. This evidence, however, does not necessarily imply that dividend increases improve the intrinsic value of firms. Financial decisions that convey favorable information to the market tend to increase stock prices even when the decisions are bad for the firm's future profitability. As shown below, dividend increases can diminish intrinsic values, but still generate positive stock price responses because they signal favorable information.
Was this article helpful?
We Are Not To Be Held Responsible If Your Online Trading Profits Start To Skyrocket. Always Been Interested In Online Trading? But Super-Confused And Not Sure Where To Even Start? Fret Not! Learning It Is A Cakewalk, Only If You Have The Right Guidance.