Share price reaction to dividend announcement; An event study on the Signaling Model from the Stockholm Stock Exchange

Abstract: This study examines the dividend announcement effect on the common stock price by a signaling hypothesis approach on the Stockholm Stock Exchange. The event study shows a positive significant cumulative average abnormal return (CAAR) of 1,54 % for positive dividend announcement in the analyst model. For negative- and neutral announcement, the reaction is non-significant. Although, negative dividend announcements have a clear negative CAAR in the event window. The results are robust when analyzing the sample year by year and for different dividend expectation models, and consistent with similar studies for other countries and regions. The overall outcome tends to support the signaling theory that a change in dividends will convey information to the market. Although this paper cannot reject that a dividend change reflects the past, since for the dividend change to have an impact on the share price, it seems like the dividend- and earning announcement has to have the same sign, i.e. either both positive or both negative.