Abstract
Previous studies have documented that an announcement of dividend initiation and resumption is associated with an increase in stock price, while Boehme and Sorescu (J Finance 47:871–900, 2002) argue that the dividend anomaly only occurs by chance. However, their sample contains firms listed within 3 and/or 5 years of their respective initial public offering (IPO) dates, as well as regulated firms. We conjecture that the confounding effects of IPOs and regulated firms may interfere with the increase in stock prices due to dividend initiations and resumptions and bias their results. We thus reexamine the long-term stock performance following dividend initiations and resumptions by excluding newly IPO firms and regulated firms. We find no evidence that the non-robust positive price drifts for firms, which initiate or resume cash dividends, is due to the confounding effects of IPOs and regulated firms. Therefore the price drifts after dividend initiation and resumption announcements may be a sample-specific result of chance, even after controlling for possible sample selection biases.
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Notes
We refer to firms that are newly listed within 3 or 5 years as IPO firms.
The traditional Fama and French three-factor regression method is also tested but not shown in the text. In this method, we construct monthly calendar time portfolios first. For each calendar month between January 1927 and December 2003, we calculate both equally-weighted and value-weighted portfolio returns of firms that have been subject to dividend events during the [c-h, c-1] prior period, where c is the calendar month and h is the investing horizon of interest. We then estimate the following three-factor regression model using both OLS and WLS specifications:
$$ {R_{p,t }} - {R_{f,t }} = {\alpha_p} + {\beta_p}\left( {{R_{m,t }} - {R_{f,t }}} \right) + {s_p}SM{B_t} + {h_p}HM{L_t} + {e_{p,t }}. $$Because event firms are likely to experience changes in size and momentum throughout the postevent horizon, we identify a different match for each firm every month of the postevent horizon. For each month, we select all control firm candidates whose market value of equity as of the prior month is between 60 percent and 140 percent of the market value of equity of the corresponding sample firm. From this set, we identify the firm whose one-year prior performance is closest to that of the sample firm. We define one-year prior performance as the holding period return over the 12-month horizon ending with the prior month. This dynamic CTAR matching selects a new control firm for each month of the postevent horizon.
We first replicate the study of BS with all samples including IPOs and regulated firms from 1927 to 2003. Although the sample period of BS is from 1927 to 1998, our results are qualitatively similar to theirs. Additionally, tests by market capitalization size deciles as in BS are also repeated. The total sample is split into two groups: one comprises of firms contained in CRSP size deciles 1 to 9 and the other comprised of decilde 10 firms. Decile 1 contains the smallest firms and so on. The value-weighted adjusted Fama and French intercepts for the three-year postannouncement horizon are estimated. According to this examination, BS find the postannouncement abnormal returns are confined to small firms. However, in contrast to BS, we do not find evidence that long-term abnormal performance following dividend initiations and resumptions is concentrated on smaller firms.
We also examine samples which only exclude regulated firms and the results are similar to those when excluding both IPO and regulated firms.
Results of the traditional Fama and French regression for our two sample groups are similar to those of the adjusted Fama and French regression.
The six subperiods of BS are 1927 to 1963, 1964 to 1988, 1989 to 1998, 1964 to 1998, 1995 to 1998, and 1927 to 1998.
In order to obtain a better estimate of the duration for the equally-weighted results of significantly positive abnormal returns, BS repeat most of their tests for two intermediate postevent horizons: months 13 to 36 and months 37 to 60. Their empirical results show weak evidence of abnormal performance during years two and three, and no reliable evidence of any significant abnormal performance during years four and five following dividend announcements. We also follow BS to examine the duration of long-term abnormal return and our findings are similar to theirs.
In the final section of their empirical results, BS also examine the postannouncement changes in the loadings of the three Fama-French factors. They document significant postannouncement reductions in the three risk factor loadings and show that they are negatively related to the contemporaneous abnormal returns. They suggest that postannouncement stock prices are gradually responding to a combination of lower required rates of returns and favorable news about firm profitability. We also replicate the test and find similar results.
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Acknowledgments
Robin K. Chou gratefully acknowledges financial support from the National Natural Science Foundation of China (No. 71232004).
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Chen, SS., Chou, R.K. & Lee, YC. The long-term performance following dividend initiations and resumptions revisited. J Econ Finan 38, 643–657 (2014). https://doi.org/10.1007/s12197-012-9243-x
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DOI: https://doi.org/10.1007/s12197-012-9243-x