There are two ways in which this proposition has been

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Unformatted text preview: gone down. There are two ways in which this proposition has been tested. The first set of studies has examined the stock price reaction when a company announces an increase or a cut in dividends. The consensus from this research is that stock prices increase when dividends are increased and drop when dividends are cut. Figure 2.3 looks at what happens to stock prices of companies that announce dividend increases and decreases.5 5 Aharony, J. and I. Swary, 1981, Quarterly Dividends and Earnings Announcements and Stockholders' Returns: An Empirical Analysis, Journal of Finance, Vol 36, 1-12. 23 Figure 2.3: Stock Price Reaction to Dividend Changes: U.S. companies Source study: Aharony and Swary. They looked at humdreds of dividend announcements made by firms in the 1970s in t his study. When dividends are cut, stock prices drop by about 4.5%, on average, whereas stock prices increase about 1%, on average, on the announcement of a dividend increase. The asymmetry between the two responses can be explained by the fact that far more firms increase dividends than decrease dividends in a typical ye...
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