Exploiting Market Reactions to Dividend Cuts : Contrarian Trading Strategies in a Short Investment Horizon - Evidence from the Swedish Stock Market

University essay from Uppsala universitet/Företagsekonomiska institutionen; Uppsala universitet/Företagsekonomiska institutionen


This paper investigates the impact of dividend reduction announcements on the returns to stocks listed on the Stockholm Stock Exchange. We perform an event study on dividend cutting firms between 2002-2016 to determine if contrarian trading on the basis of negative dividend announcement yields abnormal returns. We evaluate the immediate market reaction during a three-day event window surrounding dividend announcements. Thereafter we test a contrarian trading strategy by examining abnormal returns during a holding period up to twenty days following the initial event. We evaluate the results in reference to previous literature on post earnings (dividend) announcement drift and contrarian investment strategies. The findings suggest that the initial market reaction to dividend cuts is negative, but that the abnormal returns to buying stock following dividend reduction announcements are negligible. Furthermore, we argue that there might be means of increasing these returns by supplementary analysis of firm specifics.

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