Review of Quantitative Finance and Accounting, 12:3 (1999): 221–242
© 1999 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Stock Return Volatility and Dividend Announcements
University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, England, e-mail: Daniella.Acker@bristol.ac.uk
Abstract. This paper is based on models presented in Kim and Verrecchia (1991a, 1991b) relating to share
price volatility and the quality of announcements. It investigates the differences in informational quality between
dividend cuts and dividend rises, and between interim and ﬁnal dividend announcements. The results indicate
that when dividends are cut, the interim announcement is perceived as being more signiﬁcant than the ﬁnal,
whereas the reverse is true when dividends are increased. Implied standard deviations suggest that volatility is
expected to peak on the day of ﬁnal announcements. A peak is also expected after interim announcements of a
cut in dividend, but not after announcements of an increase.
Key words: Dividends, information, implied standard deviations
There is an extensive ‘events study’ literature that investigates the informational content of
market announcements such as ﬁrms’ annual results or dividend levels. The inﬂuential
papers by Ball and Brown (1968) and Beaver (1968) were followed by many others in this
ﬁeld, such as those by Aharony and Swary (1980), Kalay and Loewenstein (1985), Marsh
(1992), and Sant and Cowan (1994) (the list is not intended to be exhaustive). The present
study is carried out within the framework of this literature, analysing differences in
information conveyed by interim and ﬁnal dividend announcements, and by dividend cuts
It is possible to assess the market impact of an announcement and thereby infer its
information content using a number of different measures. Two that are frequently used
are the abnormal return metric and the variability of stock returns (other possibilities are
and the bid-ask spread, as, for example, in Venkatesh and Chiang (1986)).
This paper uses variability of returns as its measure, making use of the well-deﬁned
relationships between information precision
and price variance that are suggested by the
models developed by Kim and Verrecchia (henceforth KV) (1991a, 1991b).
Unlike ‘abnormal returns’ event studies, much empirical work that investigates stock
price volatility suffers from a lack of theory underpinning the hypotheses on which tests
and conclusions are based. When abnormal returns are the variable of interest, clearly a
signiﬁcant change in returns caused by an announcement indicates that new information
was conveyed to the market, which altered the perceived probability distribution of the
true value of the ﬁrm. A change in the mean or the spread of the distribution (or both)
would result in a price reaction and would legitimately be interpreted as the effect of the
disclosure of new information.
@ats-ss5/data11/kluwer/journals/requ/v12n3art1 COMPOSED: 03/08/99 11:57 am. PG.POS. 1 SESSION: 49