The Effect of Dividend Changes on Stock and Bond Prices




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    • Dhillon is from the School of Management, State University of New York at Binghamton, and Johnson is from the A. Gary Anderson Graduate School of Management, University of California, Riverside. An earlier version of this paper was presented at the 1989 Western Finance Meeting. We wish to acknowledge considerable help from A. Aweidat, J. Wansley and B. M. Miller. J. Uttamsingh and E. Zakkak helped with the data collection. Useful comments were provided by R. Castanias, P. Chung, C. Ball, L. Dann, D. Emery, R. Masulis, R. Stulz, M. Weinstein, E. Blomeyer, M. Peters, J. Richardson, W. Staats, D. Cordell, and D. Crary. D. Mayers (the editor) and two anonymous referees were very helpful in improving the paper. This work was begun when the authors were at Louisiana State University. Much of the work was done when the second author was at the University of California, Davis.


This study examines stock and bond price reactions to dividend changes. The positive stock market response to dividend increases has several potential explanations, two of the more commonly discussed being information content and wealth redistribution between stockholders and bondholders. The evidence presented supports the wealth redistribution hypothesis but does not rule out the information content hypothesis. Typically we find that the bond price reaction to announcements of large dividend changes is opposite to the stock price reaction. Our results differ from those of Handjinicolaou and Kalay.