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Asymmetric price reactions to dividend announcements: Always irrational?

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  • Gebka, Bartosz

Abstract

We demonstrate analytically that markets tend to react stronger to announcements of dividend cuts vs. increases when dividend payout costs are relatively low. This asymmetry prevails when investors are entirely rational, in contrast to Baker’s et al. (2016) prospect-theory-based explanation.

Suggested Citation

  • Gebka, Bartosz, 2019. "Asymmetric price reactions to dividend announcements: Always irrational?," Economics Letters, Elsevier, vol. 185(C).
    • Handle: RePEc:eee:ecolet:v:185:y:2019:i:c:s0165176519303544
    DOI: 10.1016/j.econlet.2019.108713
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    References listed on IDEAS

    as
    1. Malcolm Baker & Brock Mendel & Jeffrey Wurgler, 2016. "Dividends as Reference Points: A Behavioral Signaling Approach," The Review of Financial Studies, Society for Financial Studies, vol. 29(3), pages 697-738.
    2. Jabbouri, Imad, 2016. "Determinants of corporate dividend policy in emerging markets: Evidence from MENA stock markets," Research in International Business and Finance, Elsevier, vol. 37(C), pages 283-298.
    3. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 1.
    4. Veronesi, Pietro, 1999. "Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model," The Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 975-1007.
    5. Ruey-Shii Chen & Tai-Wei Zhang, 2018. "Dividend cuts and predictability," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(2), pages 249-267, April.
    6. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 2.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Fakhrul Hasan & Umar Nawaz Kayani & Tonmoy Choudhury, 2023. "Behavioral Risk Preferences and Dividend Changes: Exploring the Linkages with Prospect Theory Through Empirical Analysis," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 24(4), pages 517-535, December.
    2. Bakó, Barna & Neszveda, Gábor, 2024. "An aspirational perspective on the negative risk-return relationship," Finance Research Letters, Elsevier, vol. 61(C).

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    More about this item

    Keywords

    Dividend signaling; Investor rationality; Prospect theory;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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