Abnormal Dividend Increases – Do they Signal?

Abstract: ABSTRACT Title: Abnormal Dividend Increases – Do they Signal? - An assessment of the signaling value in dividend increases which deviate from a firm’s historical dividend policy Seminar date: 2016-06-02 Course: BUSN 89: Degree Project in Corporate and Financial Management – Master Level, 15 University Credit Points (15ECTS) Authors: Fossum Niklas, Fridlund Johan, Skog Magnus Advisor: Håkan Jankensgård Key words: Historical dividend policy, signaling value, abnormal stock returns, earnings levels, regular dividend increases, abnormal dividend increases, Swedish market Purpose: The purpose of this thesis is to examine dividend increases that are large compared to the company’s historical dividend policy. The aim is to try to bring clarity to how this will affect the stock price and the earnings level of the company. Theoretical In order to analyze the results theories such as sticky dividend perspectives: theory, market for lemons and dividend smoothing will be used. Prior research will also be accounted for. Methodology: Two quantitative studies have been performed. A calendar Time Approach study has been conducted to measure the performance of the stocks included in the sample. The earnings study has been conducted by using a model that assumes earnings to follow a random walk and therefore any earnings change becomes unexpected. Empirical The analysis is based on companies listed on the Swedish foundation: Small, Mid and Large Cap Stock Exchange. One part of the results is based on the performance between 2005 and 2013 and the other part between 2005 and 2015. Conclusion: The findings of this study are that dividend increases that are large, compared to the firm’s historical dividend policy, are preceded by larger than normal earnings increases the year before. This is however not the case for the two years following the dividend increase. The study could not find that the signaling value is greater for stocks that increased their dividends more than what has been a regular increase for the company.