Stock Dividends and Splits: Anticipation, Signaling, and Market Response

Abstract

The literature on stock distributions has documented that there is a positive stock market response to the announcement of a stock distribution and a negative relation between the market response and the presplit price of the stock. The positive market reaction has been attributed to (1) the benefits that may result from a lower per share stock price and (2) a signal from management about their favorable private information. The negative correlation between the market reaction and the presplit price may indicate (1) that the firm's share price affects the extent to which the market anticipates the distribution and/or (2) that the share price acts as an inverse proxy for the credibility of the signal. Empirical evidence supports both the anticipation and credibility-of-signal hypotheses. The anticipation effect can exist only if the anticipated event has cash flow consequences for investors. Therefore, the evidence supporting an anticipation effect implies that the positive market reaction to stock distributions is partly due to trading range benefits. Likewise, the credibility-of-signal model presupposes a decision by management to signal the market. Thus, the evidence also implies that the market reaction is partly due to a favorable signal from management.

The Information Content of Concurrently Announced Earnings, Cash Dividends, and Stock Dividends: An Investigation of the Chinese Stock Market

“…Although stock dividends do not involve any cash flows they do appear to have some association with stock returns. Research in other countries (e.g., McNichols and Dravid, 1990;Koski, 1998;Crawford and Franz, 2001;Firth, 1977) also finds a positive association between stock dividends…”

“…As stock dividends have no impact on cash flows they should have no impact on stock prices. However, research studies in the USA (e.g., Koski, 1998;Crawford and Franz, 2001) and the UK (Firth, 1977) show that stock dividends are positively associated with stock returns and this result is often attributed to stock dividends signalling good news. Chinese listed firms make heavy use of stock dividends with one being made approximately every second year.…”

“…There are also research studies that demonstrate that cash dividends have information content for security prices and returns (Firth, 1996). In addition, some studies find that announcements of stock dividends are associated with positive stock returns (Koski, 1998;Crawford and Franz, 2001;Firth, 1977); this result is often attributed to the stock dividend signaling "good news". The majority of this research has been carried out on US data or on data from other developed market economies, such as Australia, Britain, Canada, and Continental Europe.…”

Stock dividend puzzles in China

“…Evidences to support the signalling hypothesis are found by Woolridge (1983a), McNichols and Dravid (1990), Lakonishok and Lev (1987) and Crawford and Franz (2001). For Chinese listed companies, Chen et al (2002) compare the market effects of cash and stock dividend announcements and find that stock dividends are more valued by Chinese investors and offer higher abnormal returns.…”

Abnormal Returns and Stock Splits: The Decimalized vs. Fractional System of Stock Price Quotes

“…According to signaling theory, for the content of the signal to be credible, there must be a penalty associated with sending a false signal (Crawford and Franz, 2001). Supporting this view, previous "false signalers" tend to experience a less positive market response the next time a stock split is declared (Doran, 1995).…”