Stock Price Reaction to Dividend Changes: An Empirical Test

This paper investigates both long-term and short-term stock price reactions to announcements of dividend changes. We document that short-term abnormal returns surrounding dividend increases are more significant than those surrounding dividend decreases. In the long run, the mean monthly calendar time abnormal returns following dividend increases are positively significant, suggesting underreaction. Yet no long-term post-event abnormal returns are observed for dividend decreases. Examining subsamples sorted by market value of equity and percentage dividend change, respectively, we notice that the magnitude of percentage dividend changes is positively correlated with that of absolute abnormal returns, and firms of smaller size produce more apparent abnormal returns than do those of bigger size.