American Finance Association

Quarterly Dividend and Earnings Announcements and Stockholders' Returns: An Empirical

Analysis
Author(s): Joseph Aharony and Itzhak Swary
Source: The Journal of Finance, Vol. 35, No. 1 (Mar., 1980), pp. 1-12
Published by: Blackwell Publishing for the American Finance Association
Stable URL: http://www.jstor.org/stable/2327176
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THE JOURNAL OF FINANCE * VOL. XXXV, NO. 1 * MARCH 1980

The
VOL. XXXV

3ourna1

of

FINANCE

MARCH1980

No. 1

Quarterly Dividend and Earnings Announcements

and Stockholders' Returns: An Empirical Analysis
JOSEPHAHARONYand ITZHAKSWARY*
I. Introduction
ASSUMING THAT MANAGERS POSSESS inside informationabout their firms' future
prospects, they may use various signaling devices to convey this informationto
the public. Two of the most important signaling devices available are earnings
and dividend figures. The "informationcontent of dividends"hypothesis asserts
that managers use cash dividend announcements to signal changes in their
expectations about future prospects of the firm.' Since dividend decisions are
almost solely at management'sdiscretion,2announcementsof dividend changes
should provide less ambiguousinformationsignals than earningsnumbers.Furthermore,given the discrete nature of dividend adjustments,signals transmitted
by these changes may even provide informationbeyond that conveyed by the
correspondingearningsnumbers.If dividends,then, do convey useful information,
in an efficient capital market this will be reflected in stock price changes
immediately following a public announcement. It is, therefore, an empirical
question whether dividendinformationcontent is useful to capital marketparticipants.
A major difficulty in assessing dividend information content lies in the fact
that dividendand earningsannouncementsoften are closely synchronized.Thus,
one has first to adequately identify informationreflected in both earnings and
dividends and then consider the remainder of the information conveyed by
dividend announcements.

* Lecturer,GraduateSchool of Business Administration,Tel Aviv University,Israel,and Visiting

AssistantProfessor,North CarolinaState Universityat Raleigh,andthe JerusalemSchool of Business
Administration,The HebrewUniversity,and the Bank of Israel,Jerusalem,Israel,respectively.The
authors thank ProfessorYoram Peles of the Jerusalem School of Business Administrationand an
anonymousreferee for helpful comments.Any remainingerrorsare, of course, ours. We also thank
Dr. Dan Palmon of New York University for providingsome data and Ms. HarrietMcLaughlinof
North CarolinaState Universityfor very extensive progranmming
computations.
' Millerand Modigliani[9] have shownthat in the presenceof perfectcapitalmarkets,the dividend
policy of the firm per se, is irrelevantto its valuation.
2 Managersprobablywould be reluctantto use this
discretionarysignalingdevice falsely, because
when the underlyingresults are revealed,the usefulnessof this device for future signalingcould be
dramaticallyreduced.For an analysisof managers'incentivesto signal information,see Ross [12].
1

The Journal of Finance

The information content of dividends hypothesis has been tested in several

recent empirical studies, and the evidence presented seems inconclusive.Watts
[14, 15, 16], using annual data, argued that the informationcontent of dividends
can only be trivial. Pettit [10, 11] and Laub [7], using quarterlydata, suggested
that dividend announcementsconvey informationbeyond that already reflected
in contemporaneousearnings numbers. The main dispute between the studies
centers on the issue of adequate identification and control of the information
conveyed by earnings.Charest [2] examinedinvestment performanceand capital
marketefficiencywith respect to tradingbased on quarterlydividendinformation.
His findings indicated significant abnormal returns in months following the
announcement of selected dividend changes. He made no attempt, however, to
isolate the effect of dividend information from that of information already
reflected in contemporaneousearningsnumbers.
The main purpose of this study is to ascertain whether quarterly dividend
changes provideinformationbeyond that alreadyprovidedby quarterlyearnings
numbers. The study uses a methodology different from any used in previous
studies, and provides evidence on the usefulness of both quarterlydividend and
earningsannouncementsas signals of changes in future prospects of the firm.
II. The Data
A sample of 149 industrialfirms3was selected from those listed on the New York
Stock Exchange. Each firm met the followingcriteria:
1. Quarterlyearningsper share and quarterlycash dividendsper share, including extra dividends, were available on the quarterly industrial compustat
tapes of the Investor ManagementSciences for the period I/1963-IV/1976.
2. Daily rates of return were available on the tapes constructedby the Center
for Research in Security Prices (CRSP) at the University of Chicagofor the
period 1/1/63-12/31/76.
3. Declaration dates of quarterly dividend payments were available in the
annual cumulative issles of Moody's Dividend Record (published by
Moody's Investors Service, Inc., New York). It is assumed'that these dates
are available through public media such as the Wall Street Journal on the
next business day after announcement.
4. Announcement dates of quarterlyearnings per share were available in the
different annual issues of the Wall Street Journal Index.4
In addition, the daily closing Standard and Poor's Industrial Common Stock
Price Index was obtained from the annual issues of Standard and Poor's Trade
and Securities Statistics-Security Price Index Record, for the period 1/1/6312/31/76.
3This sample consists of the largestset that could be obtainedgiven our selection criteria.
4For the purpose of the current study, the data are constructedso that each quartercontains

reportedquarterlyearningsand dividends.(The originalcompustattapes containin any givenquarter

the earningsearnedand the dividendsreportedin that quarter.)All per-sharedata were adjustedfor
stock splits and stock dividends.

Dividend and Earnings Announcements

m. Methodology and Estimation Procedures

A. Dividend Expectation Model
To examine empiricallythe adjustment of common stock prices to quarterly
dividendannouncements,a measureof unexpectedchange in dividendsfirst must
be derived.The expectationmodel used in this study is a naive model.5It forecasts
no change in dividends from one quarterto another;6that is:
lj,q = Djq-1,

where:Dj,q= expected dividendper share for the j-th firm in the q-th quarterand
Dj,q= actual dividend per share announcedby the j-th firm in the q-th quarter.
Accordingly, a dividend announcement is considered favorable7if Dj,q> 1)j,q,
neutral if Dj,q= 1)j,qand unfavorable8if Dj,q<1)j,q
Justificationfor the naive expectationmodel is derivedfrom the reluctance-tochange dividendsassertation,which states that managersdo not change dividend
payments unless they have reasons to expect a significant change in the future
prospects of the firm. Hence, an increase in dividends should signal a favorable
change in managers'expectations,whereasa decreasein dividendsshould indicate
a pessimistic view of the firm's future prospects. The empiricalobservationthat
most firms follow a policy of dividend stabilizationis consistent with the reluctance-to-changedividendsassertion.In our sample,for example,about 87 percent
of all cases falls in the category of no change in quarterlydividendpayments (see
Table I). Furthermore, Laub [6] has shown that the adjustment process of
quarterlydividends is more likely to be discrete.
B. The Timing of QuarterlyDividend and Earnings Announcements
The major issue to consider is whether quarterly dividend announcements
provide informationbeyond that already provided by quarterly earnings numbers.9A major difficulty lies in the fact that quarterly earnings and dividend
figures often are released to the public at approximatelythe same time. In these
5An alternativedividendexpectationmodel was also used in this study. This is a modifiedversion
of the Lintner[8] model proposedby Fama and Babiak [3] and adjustedhere for quarterlydata:
Dj,q - Dj,q-1 = bljDj,q-1+ b2jEj,q + b3jEj,q-4 +

6j,q,

where:
Ej,q= earningsper share reportedby the j-th firm in the q-th quarter,and
Sj,q= a disturbanceterm assumedto satisfy the usual requirementsof the OLS regressionmodel.
It representsthe unexpectedchangein quarterlydividends.
This model providedresults (not reported)similarto those presentedbelow.
6 No seasonality is observedin the data with respect to changes in dividendsfrom one quarterto
another.Furthermore,Laub[6, p. 558] providesevidencethat ". . . there seems to be some additional
informationin the quarterlydividendsand earningsnot presentin the annualdividendsand earnings."
7 The cases examinedincludedividendincreasesdue to the distributionof extra cash dividendonly
if the extra dividenddiffersfromthat distributedin the same quarterof the previousyear.
8 Only decreases in regular dividends are considered.

numberson commonstock prices

'The effect of publishedquarterlyand annualearnings-per-share
has been demonstratedby Ball and Brown [1], Joy, Litzenbergerand McEnally[5], and others.

The Journal of Finance

cases, any observableadjustmentof stock prices may be the result of a confounding of the informationconveyed by earningsand dividends.
In order to isolate possible dividend effects from those of earnings,this study
examines only those quarterlydividend and earnings announcementsconveyed
to the public on differentdates within any given quarter.In this way, a distinction
is made between earnings announcementsthat precede or follow and those that
accompanydividend announcementswithin any given quarter.The sample data
frequency is presented in Table I.
The sample data are grouped accordingto the direction of dividend changes
from one quarter to another,10and by the number of trading days between
earnings and dividend announcement dates in any given quarter. The sample
includes 2612dividendannouncementsthat follow (Panel A) and 787that precede
(Panel B) quarterly earnings announcements by at least eleven trading days.
Among these are 384 increases, 47 decreases, and 2968 cases of no change in
dividends.
C. Measurement of Abnormal Performance
Assumingthat security returnsare distributedmultivariatenormal,the following market model is used:'1
Rjt = aj + fjRmt + ijt,

(2)

where:
Rj = the geometricmean'2 of the daily rates of return of securityj, over a five
consecutive trading-dayperiod, t,
=
the geometric mean of the daily rates of return of Standard and Poor's
1imt
Industrial - tock Price Index, over a five consecutive trading-dayperiod,
t,

f1j = covariance (4jt, Rmt)/variance(1Rmt),

= E(Ajt) - 8jE(Rmtt),and
disturbanceterm of securityj at period t, and E(,jt) = 0.
Using an OLS regression,equation (2) is run for each stock over the entire period
studied.'3Retum observations are excluded for fifteen days before and fifteen
days after each quarterlydividend and eamings announcementbecause if these
announcements affect stock prices, the residual terms ,jt wil not have a zero
expected value in the period surroundingeach announcementdate.
In order to derive a dividend effect that is not confounded with an earnings
aj

t=

0 All three categories exclude cases that involve stock splits or stock dividends (largerthan 10
percent) in either the currentor previousquarterin question.
See Fama [4, pp. 63-132] for a discussionof this model.
12As pointed out by Scholes and Williams[13], many securitieslisted on organizedexchangesare
tradedonly infrequently,and this introducesinto the marketmodel a potentiallyseriouseconometric
problemof errorsin variables.This nonsynchronoustradingproblemappearsparticularlysevere with
daily prices.To overcomesuch a potentialproblemwe estimatethe marketmodelusingthe geometric
means of the daily rates of returnover five consecutivetrading-dayperiods.The coefficientsobtained
(&,,/,) are then used to estimate daily residuals.(Notice that Scholes and Williams[13] suggest a
differentestimationprocedureto attack this problem.)
13Joy, et al. [5, Appendix]estimate the slope coefficientof equation (2) in altemative ways and
concludethat empiricalresults obtainedusing these estimates are similar.

Dividend and Earnings Announcements

Table I

The Sample Frequency of Quarterly Dividend Announcements Relative to

Quarterly Earnings Announcements
A. Earnings Announcements precede Dividend Announcements
Number of Trading Days Between Announcement Dates
of Quarterly Dividends and Earnings

Category
Increase in Dividendsa
No Change in Dividends
Decrease in Dividends

0-10

11-20

21-40

41-60

61+

11-61+
(Total)

379
2726
68

132
974
13

136
988
10

33
274
1

9
42
0

310
2278
24"

1
2
0

74
690
23c

B. Earnings Announcements follow Dividend Announcements

78
Increase in Dividends
45
27
644
No Change in Dividends
464
211
8
14
8
Decrease in Dividends
' Comparing
quarter-to-quarter change in dividend per-share.
b From 15 different companies.
'From 12 different companies.

1
13
1

effect, the dividend expectation model is applied only to stock/quarters where

cash dividends are announced at least eleven trading days preceding or following
the earnings announcement in the same quarter. The market model is then used
to determine whether stockholders realized abnormal returns in the days surrounding these quarterly dividend and earnings announcements. Abnormal returns, E'i, for frm j on day i are estimated as the difference between the actual
return on day i and the return predicted from the market model
Eji=

1Rji -oi -

j R,,,,d,

(3)

where i denotes the i-th day relative to a given announcement date for firm j.
Then, for any day i within the interval of ten days before to ten days after an
announcement date, the average residual (AR) across sample members is

ARi

z>N

V,q _1'1Ejqi

Qq-1 Nq

(4

where Nq is the number of firms in a calendar quarter q, and Q is the number of

quarters for a given group. (The various groups considered will be discussed in
Section IV.)
The variables eji and AR, are used to measure the information content of
quarterly dividend and earnings announcements and the efficiency with which
this information is incorporated into stock prices. The null hypothesis is that &,i
are drawn from a distribution with zero mean; that is, that the announcements of
quarterly dividends and earnings have no systematic effect on corresponding
stock prices. To test the hypothesis that the average residual at day i is statistically different from zero, the following t-statistic is used:
t(ARO)=.

=
ARiStQ, .t(Q - 1),

S(eqi)

(5)

The Journal of Finance

where:'4

eqi=

Ejqi,

and S(eqi)= AI(Q_

) XQ(eqi-ARX)2.

Cumulative effects of the abnormal retums (CAR) behavior in the days

surroundingthe dividendand earningsannouncementdates (event time zero) are
obtained by summing ARi over event time (K =-10,

CARK= S2K

. . . , 0, . . ., + 10):

ARi.

(6)

IV. Empirical Results and Analysis

A. Information Content of Dividend Changes

Using the dividend expectation model, the sample data are divided into three
subsets: (a) no change in dividends, (b) increases in dividends and (c) decreases
in dividends.Each of these subsets is furtherdivided into two groups:(1) cases in
which earnings announcementsprecede dividend announcements,and (2) cases
in which earnings announcements follow dividend announcements (by at least
eleven trading days). The daily average (AR) and the cumulative daily average
(CAR) abnormalreturnsrealizedby stockholdersin the twenty days surrounding
the dividend announcementdates (hereafterAD) are presented in Panels A, B,
and C of Table II, for each of these groups. The t-statistics presented indicate
whether the AR are significantlydifferentfrom zero. Finally, the CAR plotted in
Figure 1 provide an overview of the results.
Results in Panel A of Table II indicate that stockholdersof companiesthat did
not change their dividends,earned,on average,only normalreturns (as predicted
from the market model) over the twenty days surroundingthe announcement
dates. The CAR during this period are of small magnitudes and the AR do not
differ significantly from zero. These results are similar whether earnings announcements precede or follow dividend announcements.
Results in Panel B indicate that stockholders of companies that announced
dividendincreasesrealized,on average,positive abnormalreturnsover the twenty
days surroundingannouncement dates. Most of the statistically significant abnormal returns occurred during days AD-1 and AD.'5 Moreover, they are of
similar magnitude for both groups whether earnings announcementsprecede or
follow dividend announcements (.72 and 1.03percent, respectively, for these two
days combined).
Finally, stockholders of companies that reduced their dividends sustained, on
average, negative abnormal returns during the twenty days surrounding an4 Since residualsof differentsecurities in any calendartime may be cross-sectionallycorrelated
due to industryand other factors,i,,' are averagedin each calendarquarterq to obtain eq,.The t test
assumes that the eq,are identicallyindependentdistributedacross time (quarters).Watts [17] used
the same t-statistic and examined this assumption. Watts (pp. 142-143) indicated that ". . the
distributionof abnormalreturns is relatively stationary and that the t tests reported ... are wellspecified."A similarexaminationof the present study's abnormalreturnsreached the same conclu-

sions.
1 Day AD is the dividendannouncementdate when the informationis assumedto becomepublicly
availablethroughthe media. Day AD-1 is the declarationdate and in many cases the announcement
is revealedby the wire serviceson that day.

C.

B.

I.

II.

A.

I.

II.

I. No

11.

t
t
t
t
2278 t
AR
AR
AR
AR
AR
AR
Dividend
CAR
CAR
CAR
CAR
Dividend
CAR
CAR
Days
Change
tValue
(%)
Value
Value
(%)
Value
Value
(%)
Value
(%)
(%)
(%)
(%
(%
(%
cases;
*Significant
(%)
Earnings
(%)
Earnings
Earnings
(%)
Earnings
Earnings
Eamnings
in
**Significant
*Significant
at at h
at
Increase
Decrease follow
Relative
5 2.50.5690
follow
follow
precedeto
precede
precede
Dividend
cases;
AD
percent
percent
percent
Dividend
Dividend'
Dividend"
d
Dividend'
Dividend'
Dividend'
level
310
level
level
- - cases;
.20.46
d
.20
(one-tailed
(one-tailed
74 - (one-tailed
test).
.31
.26
test).
test). cases; 11

.40.90.40

.05.27.05 .151.37

.05.80.05

-1.22
.04

.55
.151.18

.15-.13
.351.74
.40 .02-1.24

.12
.171.72

.03
.04-.04
.00
- -

.08
.251.12

-04.0400
- - -

-8

.31.94.06

04 .1400

-7

.62
.47-1.78

-1.53
.2208
cases.

.72
.95-1.39

.551.29
.20

.23.86.24

1.00
1.76
.45
- .97.22
03
- -

.83.21.12

84 .71

-04-79-.451.25
.38
-2.23
-2.36
-

24 -1.01
-1.39
-70
- cases;
.9844
-1.45
'23 - -

-1.57
.18

- - -

- -

.16.87
.14
- .14.21
02-

.09-1.71
23
- - -

.29.29.02

1.03
.00 .04
-

.13.4304

.30.16.01

-1.42
07

71 -.5213-13.061.94
.19
- - - -

.31.12.01

1.09
-.07-.02
.05
- -.04.2502

63 .3608

.08.9214

.13
.441.74

67
-2.57
-2.68

.66.14.03

.14
.061.13

.06
.38-1.01
- -

.37
.67 .433.23*
1.33
3.00*

.33.73.05

-.04.8003

.36
1.69
2.29*
*

.782.35*
.35
*

.28.58.05

.01.92.03

-4.27
.67.35

.17
.36.06 .951.44
1.75

.31.52.03

.051.42
.06

.59 -4.02
.30.25
-3.85
1.00

.46
.95.00.00
1.82
.07
-

.32.14.01

.121.77
.07
- -

1.18
.35
.33.07 -3.67
-3.78

-2.23
1.41
41
-

.421.67
.10

.01.7711

.47.78.05

.02.16.01

- -

-1.08
-1.46
-5.39 -1.13 -4.62
1.97**

.95
-4.44
1.79

-1.17
14
1.27

1.03
.72
.08
- .94.6209

.12.03
-3.75
- .6424
-3.99

-4.15
-1.20
.43

.27
1.33
.06
-

.88.6606

.50.40.03

.071.18
.05
- -

.07.02
-3.70
.76.29 -4.13

-1.89
1.07
26
- -

.51.22.01

.04.7503
- -

.27.13
.24.10 -4.00
-3.60
- -

.2804
1.03

.97.77
.09
- .90.44

-1.25 -4.33
.80.33
-1.92
-4.85

.29.22
-4.46
.74.39 -4.55

-6

-5

Measures
for

-4

Days
-3

- -

.2701
.03
- - -

.80.13 .81.8309
1.16
- -

.54.59.03

00 .81.03

.81.0200

.48.71.06

.63.09
1.25

-1

AD

07-

Table
II

Surrounding

+2

+3

Announcement

+4

Dates

+5

+6

+7

+8

.01.34.01

Dividend

+1

.51.05.00

-2

-3.72
.14.05

- -

Performance

-.01.73.03
- -

-1.69 -3.16 -2.30

-4.26
-1.70
-1.88***

-9

- -

.92.64.47
1.13
-1.90
.46
.86.13.06

-10

+9

The Journal of Finance

Daily

CAR(%)

Cumulative
a.

Dividend

0.15-

Average

Abnormal Returns:
Cases Where Earnings
Precede Dividend Announcements

Decrease

CAR(%)

b.

Dividend

Announcemelnts

Increase

1.04A

-0. 37.

0.91-

-0.90

0.78.

-1.4:

0.65-

-1.96

0.52l

-2.49

0.39-

-3.02

0.26l

-3.55,

0. 13X

-4.00

0.

-4.61

'

-10 -8

-3

AD 2

-01

710

Days Relative
to the Announcement
of DIVIDENDS

-10-8
Date

-3 AD 2

7 10

Days Relative
to the Announcement
of DIVIDENDS

Date

Figure 1. Daily cumulativeAverageAbnormalRetums: Caseswhere EarningsAnnouncements

precede DividendAnnouncements

nouncement dates. Again, most of the statistically significant abnormalreturns

occurredduring days AD-1 and AD, and they are of similar magnitudefor both
groups whether earnings announcementsprecede or follow dividend announcements (-3.76 and -2.82 percent,respectively,in Panel C of Table II). Notice that
abnormalreturns for the decreased dividend groups are of much greater magnitude (in absolute terms) than those of the correspondingincreased dividend
groups.

These findings of capital marketreaction to dividend announcementsstrongly

support the informationcontent of the dividendhypothesis, namely that changes
in quarterly cash dividends do provide information about changes in management's assessment of future prospects of the firm. Furthermore,analyzing only
the cases where dividendsand earningsare announcedat differentpoints in time
and obtaining similar results for either group whether earnings announcements
precede or follow dividend announcements,lends support to the hypothesis that
quarterly dividend announcements contain useful information beyond that already provided by quarterlyearningsnumbers.
The results also support the semi-strong form of the efficient capital market
hypothesis that on average, the stock market adjusts in an efficient manner to
new dividend information.Almost all of the price adjustment occurred within
days AD-1 and AD.
B. Information Content of Earnings: Stocks Classified According to Dividend
and Earnings Changes
To investigate further the hypothesis that quarterlydividend announcements
provide useful information beyond that provided by correspondingquarterly

Dividend and Earnings Announcements

earningsnumbers,we examine stock performancein the days surroundingearnings announcement dates (hereafter AE) in quarters where both dividend and
earnings changes provide favorable signals. For this purpose, a naive earnings
expectation model is applied to the cases included in each dividend increase
group.'6This model forecastsno change in earningsannouncedin a given quarter
from those announcedin the same quarterof the previous year. Accordingly,an
increase in earningsover those of the correspondingquarterfor the previousyear
is considereda favorablesignal and a decreasein earnings,an unfavorablesignal."7
Of the 310 dividend increase cases where earnings precede dividend announcements, 89 percent (i.e., 276 cases) were also in the earnings increase category.
Similarly, of the 74 dividend increase cases where earnings follow dividend
announcements, 86 percent (i.e., 64 cases) were also in the earnings increase
category.Results are presentedin Table III and Figure2 and are discussedbelow.
Results in Table III indicate that stockholders of companies that announced
both earnings and dividend increases in the same quarter realized, on average,
significantpositive abnormalreturns at the earningsannouncementdates (or at
AE-1) whether these earnings announcements preceded or followed the corresponding dividend increase announcements.These results, combined with evidence presented in Table II, provide further support of the hypothesis that
announcements of quarterly dividend changes provide informationbeyond that
already provided by correspondingquarterlyearningsnumbers.When dividend
increases are announced before or after earnings increases, stockholdersrealize
abnormalreturns in the days surroundingboth dividendand earningsannouncement dates.'8This indicates that the significantabnormalreturnsrealizedat the
time of the announcements of dividend changes do not reflect a diffusion or a
leakage of the informationconveyed by earningsnumbersbut rather, additional
informationgeneratedby the dividendannouncements.Thus, these findingshave
important implications for the effectiveness of using quarterly dividend and
earningsnumbersas devices for signalingmanagementexpectations,namely that
changes in quarterly dividends provide a signaling device that is at least as
effective as quarterlyearningsnumbers.
V. SUMMARY

This study attempts to resolve the empirical issue as to whether quarterly

dividend announcements convey useful information beyond that provided by
quarterly earnings numbers. The methodology used examines only those quarterly dividendand earningsannouncementsmade publicon differentdates within
any given quarter. This distinguishes earnings announcementsthat precede or
follow from those that accompany dividend announcements. Findings about
6 Whenthe naive earningsexpectationmodelwas appliedto the cases includedin the two dividend
decrease groups,of the twenty-four(twenty-three)dividenddecrease cases where earningsprecede
(follow) dividend announcements,thirteen (six) cases were also in the earningsdecrease category.
Due to the small number of observationsin these categories,analysis was restricted to favorable
signals only.
17 See Joy, et al. [5] for a justificationof this model.
18 Stock performancefor the 276 and 64 cases analyzedin this section was also examinedfor the
days surroundingthe dividendannouncementdates. Results were similarto those presentedin Panel
B of Table II.

**

II.

I.
t

276CAR AR CAR AR
Value
Value
(%) Days
(%)
Earnings
(%)
Earnings
(%)
cases;
Significant
Significant
b
follow
at at 64
Relative
precede
I 0.5
to
caes.
percent
percent

AE
Dividendh

Dividend'

level
level
.11.57.11
-

.00.02.00

-10

(one-tailed
(one-tailed
.19
.08-1.11
test).
test).

.07.56.07

-.21-.61-.13 .12.33.05

-9

-8

.09.82.12

.14
.02-1.20

-7

Performance

- - .09.02.00

.17
.151.82

-6

Cases

- - .12.19.03

.24
.391.41

-5

-4

Measures
where
for

.05.40.07

-.25
.14-1.27

.14.79.19

.23.88.09

-3

.25.85.11

.52
.751.71

-2

Table
Earnings

.872.62*
.62

.33
1.08
1.59

-1

andSurrounding

1.46
1.16
.29

.58
1.66
3.14*

AE

1.33
1.52
.36

.41.06
1.72

+1

1.55
1.78
.26

.25
1.64
1.97

+2

both
Days

III

Earnings
Dividends

Increase

- +3

1.84
.46.06

1.92
.28.05

1.96
.79.12

.32
2.24
1.72

+4

2.09
.87.13

2.33
.38.09

+5

.45.10
2.19

.35.05
2.28

2.22
.19.03

.85.10
2.18

Announcement
Dates:

- +6

- -

- -

+7

Dividend and Earnings Announcements

Daily

CAR(%)

a.

Cumulative

Average

Precede

Earnings

Abnormal
Returns:
Dividends
Increase
Dividend

CAR(%)

2.33

2.22'

2.08

1.95

1.82

1.68

1.56

1.41

1.30

1.14

1.03

0.86-

0.77

0.59'

0.51

0.32

0.25

0.06

Cases

b.

Where

11

Both

Earnings

Follow

Earnings

and

Dividend

0
-0.02

-0 .21
-106
Days

Relative
Date

-3

AE 2

7 10

to the Announcement
of EARNINGS

-10-4
Days

Relative
Date

-3

AE 2

710

to the Announcement
of EARNINGS

Figure 2. Daily cumulativeAverageAbnonnal Returns:Cases where both Earningsand Dividends Increase

capital market reaction to the dividendannouncementsstudied strongly support

the hypothesis that changes in quarterlycash dividendsprovide useful information beyond that provided by correspondingquarterly earnings numbers. In
addition, the results also support the semi-strong form of the efficient capital
markethypothesis;that is, on the average,the stock marketadjustsin an efficient
manner to new quarterlydividend information.
References

1. R. Ball, and P. Brown. "An EmpiricalEvaluationof AccountingIncome Numbers.' Journal of

AccountingResearch, 6 (Autumn1968).
2. G. Charest."DividendInformation,Stock Returnsand MarketEfficiencyII."Journal of Financial Economics,6 (June/September1978).
3. E. Fama, and H. Babiak. "DividendPolicy: An EmpiricalAnalysis."Journal of the American
Statistical Association, 63 (December1968).
4. E. Fama.Foundation of Finance (New York,Basic Books: 1976).
5. M. 0. Joy, R. H. Litzenberger,and R. W. McEnally. "The Adjustment of Stock Prices to
Announcementsof UnanticipatedChanges in QuarterlyEarnings."Journal of Accounting
Research, 15 (Autumn1977).
6. M. P. Laub."SomeAspects of the AggregationProblemin the DividendEarningsRelationship."
Journal of the American Statistical Association, 68 (September1972).
7. M. P. Laub. "On the InformationalContent of Dividends,"Journal of Business, 49 (January
1976).

12

The Journal of Finance

8. J. Lintner. "Distributionof Incomes of CorporationsAmong Dividends,Retained Earningsand

Taxes."American EconomicReview,46 (May 1956).
9. M. H. Miller,and F. Modigliani."DividendPolicy, Growth,and the Valuationof Shares."Journal
of Business, 34 (October1961).
10. R. Pettit. "DividendAnnouncements,Security Performance,and Capital Market Efficiency."
Journal of Finance, 27 (December1972).
11. R. Pettit. "The Impactof Dividendand EarningsAnnouncements:A Reconciliation."Journal of
Business, 49 (January1976).
12. S. A. Ross. "The Determinationof FinancialStructure:The Incentive-SignalingApproach."The
Bell Journal of Economics,8 (Spring1977).
13. M. Scholes, and J. Williams."EstimatingBetas fromNonsynchronousData."Journal of Financial Economics,5 (December1977).
14. R. Watts. "The InformationContentof Dividends."Journal of Business, 46 (April1973).
15. R. Watts. "Commentson the Impact of Dividend and EarningsAnnouncements:A Reconciliation."Journal of Business, 46 (January1976).
16. R. Watts. "Commentson the InformationalContent of Dividends."Journal of Business, 49
(January1976).
17. R. Watts. "Systematic'Abnormal'Returns After QuarterlyEarningsAnnouncements."Journal
of Financial Economics,6 (June/September1978).