Review of Quantitative Finance and Accounting, 12 (1999): 113–133
© 1999 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Stock Price Adjustment to the Information in
R. D. VAN EATON
College of Business Administration, University of North Texas, Denton, Texas 76203
Abstract. This paper examines abnormal stock returns in the three years surrounding relatively large changes
in dividends announced during the 1971 to 1990 period. The main results are that statistically and economically
signiﬁcant negative post-announcement abnormal returns of Ϫ11% and Ϫ17% over the post-announcement year
are found for ﬁrms which decrease dividends and those which omit their dividends. Firms resuming and ﬁrms
increasing dividends do not exhibit signiﬁcant abnormal returns, on average, over the post-announcement year.
The pattern of lagged price adjustment to negative dividend change information differs from that reported for
‘earnings surprise’ ﬁrms in important respects. While the dividend change ﬁrms do exhibit returns behavior
consistent with year-to-year returns momentum, differences in prior year returns do not explain the differences
in returns over the post-announcement period.
Key words: Dividends, efﬁcient markets, abnormal returns
This paper provides new evidence on the pattern of stock price adjustment to the infor-
mation contained in dividend change announcements. Abnormal returns are estimated for
a three year period around changes in dividends for NYSE/AMEX ﬁrms over the
1971–1990 period. We report that the magnitude of the price reaction at the time of the
announcement of the dividend change is greatest for ﬁrms announcing dividend decreases
and omissions. Over the post-announcement year these dividend decrease and dividend
omission ﬁrms have average abnormal returns of approximately Ϫ11% and Ϫ17%. In
contrast, dividend resumption ﬁrms and dividend increase ﬁrms do not exhibit signiﬁcant
abnormal returns over the year after the announcement of the change.
Michaely, Thaler and Womack (1995) anticipate some of the results reported here.
Speciﬁcally, Michaely et al. present evidence of a lagged price adjustment to dividend
omissions, as we do here. While they examine abnormal returns after announcements of
initial ﬁrm dividends, we examine the abnormal returns after dividend resumptions for
ﬁrms which had not paid dividends for at least two years. In addition, we examine
post-announcement returns for ﬁrms announcing dividend increases and decreases.
The results reported in this study are of additional interest because of their possible
relation to other returns regularities. One is the apparently lagged reaction to the infor-
mation contained in quarterly earnings announcements
. The signiﬁcant and relatively
large difference between the average post-announcement abnormal returns for positive
and negative dividend news ﬁrms is similar to the well documented pattern of abnormal
returns after large (unexpected) changes in quarterly earnings. Given the association
between dividend changes and the earnings performance of the ﬁrm
, the question of
@ats-ss11/data11/kluwer/journals/requ/v12n2art2 COMPOSED: 02/15/99 2:02 pm. PG.POS. 1 SESSION: 8