Trading Behavior and the Unbiasedness of the Market Reaction to Dividend Announcements




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    • Bajaj is from the University of Southern California, and Vijh is from the University of Iowa. We appreciate comments of seminar participants at the University of Southern California and the University of Arizona. Warren Bailey, Harry DeAngelo, Bruce Grundy, Larry Harris, David Shimko, Mark Weinstein, and Randolph Westerfield provided specific suggestions to improve the article. We are particularly grateful to David Mayers (the editor) and an anonymous referee for their help in improving the article. All remaining shortcomings are our own responsibility.


This article examines the price formation process during dividend announcement day, using daily closing prices and transactions data. We find that the unconditional positive excess returns, first documented by Kalay and Loewenstein (1985), are higher for small-firm and low-priced stocks. Price volatility and trading volume also increase during this period. Examination of trade prices relative to the bid-ask spread and volume of trades at bid and asked prices shows that the excess returns cannot be attributed to measurement errors or to spillover effects of tax-related ex-day trading. Rather, the price behavior is related to the absorption of dividend information.