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Dividend Surprises Inferred from Option and Stock Prices

Authors

  • SASSON BAE-YOSEF,

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    • Bar-Yosef is with the School of Business Administration, Hebrew University of Jerusalem. Sarig is with the Leon Recanati Graduate School of Business Administration, Tel-Aviv University. We thank Franklin Allen, Jeffrey Callen, Dan Givoly, Gur Huberman, Avner Kalay, Roni Ofer, Matt Spiegel, Eli Talmor, David Mayers, the editor, and an anonymous referee for helpful suggestions. Partial financial support from the Krueger Center is gratefully acknowledged.

  • ODED H. SARIG

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    • Bar-Yosef is with the School of Business Administration, Hebrew University of Jerusalem. Sarig is with the Leon Recanati Graduate School of Business Administration, Tel-Aviv University. We thank Franklin Allen, Jeffrey Callen, Dan Givoly, Gur Huberman, Avner Kalay, Roni Ofer, Matt Spiegel, Eli Talmor, David Mayers, the editor, and an anonymous referee for helpful suggestions. Partial financial support from the Krueger Center is gratefully acknowledged.


ABSTRACT

This paper introduces a new method to measure the unexpected component of dividend announcements. While measures used previously were based on various arbitrary models of dividend expectations, our suggested method compares the reaction of stock and option prices to dividend announcements. Our measure is compared to commonly used model-based measures, to a Box-Jenkins time-series-based measure, and to a Value-Line Investor Survey-based measure of dividend surprises. The new measure is more highly correlated with the market's reaction to the announcements than are alternative measures of dividend surprises. The new measure is also shown to be insensitive to the extent to which the options used to identify unexpected dividend announcements are in- or out-of-the-money.

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