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Dividend Changes and Security Prices

Dividend Changes and Security Prices ABSTRACT This paper analyzes the effect of unexpected dividend changes on the values of common stock, preferred stock, and bonds. Two potential effects are identified: a wealth transfer effect and a signalling effect. Previous studies have shown that positive (negative) dividend change announcements produce positive (negative) common stock price changes. Whereas these findings have been attributed to the signalling aspect of dividends, they are also consistent with the wealth transfer hypothesis. Based on the announcement day returns of common and preferred stock and bond holders, it is demonstrated that the primary factor influencing security returns in response to dividend changes is market signalling. A wealth transfer effect is not necessarily ruled out, but if it exists it is dominated by the signalling effect. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Dividend Changes and Security Prices

The Journal of Finance , Volume 38 (5) – Dec 1, 1983

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References (20)

Publisher
Wiley
Copyright
1983 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1983.tb03844.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper analyzes the effect of unexpected dividend changes on the values of common stock, preferred stock, and bonds. Two potential effects are identified: a wealth transfer effect and a signalling effect. Previous studies have shown that positive (negative) dividend change announcements produce positive (negative) common stock price changes. Whereas these findings have been attributed to the signalling aspect of dividends, they are also consistent with the wealth transfer hypothesis. Based on the announcement day returns of common and preferred stock and bond holders, it is demonstrated that the primary factor influencing security returns in response to dividend changes is market signalling. A wealth transfer effect is not necessarily ruled out, but if it exists it is dominated by the signalling effect.

Journal

The Journal of FinanceWiley

Published: Dec 1, 1983

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