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This study provides further empirical evidence on the informational content of dividends hypothesis. To reduce the misclassification of unfavorable and favorable dividend announcements, which can result when small dividend changes are included, the analysis is restricted to cases where a substantial shift in dividend policy has occurred. Specifically, the authors examine the aggregate market response to announcements of (1) omitted dividends, (2) dividend decreases of at least 2S percent, (3) dividend increases of at least 2S percent, and (4) initial dividend payments. The results indicate that announcements of dividend omissions and large decreases have a pronounced downward impact on stock prices even though the market has anticipated the forthcoming news to a large degree. Similarly, the market reaction to initial dividend declarations is found to be substantial and much greater than previously found for favorable dividend classifications in general.

Here, the relation between stock price reactions to announced dividend changes and the yields of the underlying securities is examined. A significant positive (negative) relationship is detected between announcement date returns and yield for dividend increases (decreases) even after controlling for the magnitude of the dividend change. Price reactions associated with dividend increases vary directly with the change in yield and, on average, low-yielding companies do not experience abnormal returns when they increase their dividends. Implied in these results is that the information conveyed through dividend changes varies with the yield of the underlying security and the market response is a function of factors beyond the pure information effect.

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