Review of Quantitative Finance and Accounting, 19: 45–63, 2002
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Risk Shift Following Dividend Change Announcement:
The Role of Trading Volume
DR. SANGPHILL KIM
Department of Management, College of Management, University of Massachusetts Lowell, Lowell, MA 01854,
U.S.A. Tel.: 978-934-2770, Fax: 978-934-3011
DR. OLIVER M. RUI
Department of Accountancy, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong
Tel.: 852-2766-7081, Fax: 852-2330-9845
DR. PETER XU
Manager of Research, Prudential Investment, Short Hills, NJ 07078 Tel.: 973-467-7380, Fax: 973-467-7399
Abstract. This study investigates the role of the trading volume in explaining the shift of ﬁrm’s total and
systematic risk when a dividend change is announced. We compared the differential interpretation hypothesis and
pre-announcement disagreement hypothesis with more than 20,000 samples collected for 30 years. We found that
the total risk generally increases regardless of the level of abnormal trading volume, which supports the differential
interpretation hypothesis. We also found a positive relationship between announcement-period abnormal trading
volume and post-announcement changes in beta, which is only consistent with the differential interpretation
hypothesis. However, the decrease in beta for the majority of sample ﬁrms is only consistent with the pre-
announcement disagreement hypothesis.
Keywords: trading volume, risk shift, dividend change announcement, differential interpretation hypothesis,
pre-announcement disagreement hypothesis
JEL Classiﬁcation: G1, G14
Public announcements are often accompanied by abnormal trading activity. The conven-
tional explanation is that public announcements usually generate new information, which
is not available before. However, it is well known that new information alone does not
necessarily result in trading. If all traders have common expectations and interpret the news
identically, then market price will adjust without any abnormal trading activity. Liquidity
shocks can explain trading but not abnormal trading following public announcements. It is
overstated to assume that liquidity shocks may be correlated with news announcements.
In general, it takes heterogeneous information to explain abnormal trading volume
following exogenous information arrivals.
Recent theoretical work in this area