Stock Market Reactions to Dividend Initiations and Omissions: Evidence from Nasdaq Stockholm

Abstract: This article examines the stock market reactions to dividend initiations and omissions, by studying excess returns for certain time periods. Consistent with prior literature, we find that the excess returns for omitting firms are significantly negative the year before and during the announcement. The post-announcement reaction is, contrary to prior research, significantly positive. For initiating firms we find positive excess returns before and during the announcement, but find no evidence for excess returns afterward. Furthermore, we confirm prior research by showing that the magnitude of the short-run reactions to dividend omissions is significantly larger than the reactions to initiations. Our results show that this asymmetry also holds in the long run following a dividend announcement, something not confirmed in prior research. The short-run asymmetry is stronger in the sectors Financials and Real Estate and reversed for Communication Services. Lastly, we find evidence for the relationship between the post-announcement price response after a dividend omission and the time until the dividend is reinitiated, indicating that a shorter time until reinitiation corresponds to a higher three-year post-announcement excess return.