Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

Authors

  • RONI MICHAELY,

  • RICHARD H. THALER,

  • KENT L. WOMACK

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    • Michaely and Thaler are from the Johnson Graduate School of Management, Cornell University. Thaler is also with the National Bureau of Economic Research. Kent Womack is from Amos Tuck School of Business Administration, Dartmouth College. The authors thank the seminar participants at Chicago, Cornell, Illinois, MIT, and Wisconsin and especially Vic Bernard, Laurie Bagwell, Eugene Fama, Steven Kaplan, Charles Lee, Jay Ritter, and David Scharfstein for helpful comments. We also benefited greatly from the comments of the referee and René Stulz, the editor. Errors are ours alone.


ABSTRACT

This article investigates market reactions to initiations and omissions of cash dividend payments. Consistent with prior literature we find that the magnitude of short-run price reactions to omissions are greater than for initiations. In the year following the announcements, prices continue to drift in the same direction, though the drift following omissions is stronger and more robust. This post-dividend initiation/omission price drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples earns positive returns in 22 out of 25 years. We find little evidence for clientele shifts in either sample.

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