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The Declining Information Content of Dividend Announcements and the Effects of Institutional Holdings

Published online by Cambridge University Press:  06 April 2009

Yakov Amihud  and
Kefei Li
Yakov Amihud
Affiliation:
yamihud@stern.nyu.edu, Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Kefei Li
Affiliation:
kefei.li@morganstanley.com, Morgan Stanley, Global Capital Markets, 1585 Broadway, New York, NY 10036.
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Abstract

We propose an explanation for the “disappearing dividend” phenomenon: a decline in the information content of dividend announcements, which reduces the propensity of firms to use dividends as a costly signal. A reason for a decline in the information content of dividends is the rise in holdings by institutional investors that are more sophisticated and informed. Indeed, we find a decline in CAR at dividend change announcements since the mid–1970s. Across firms, CAR is a decreasing function of institutional holdings. Institutional investors exploit their superior information and buy before dividend increases. In addition, dividends are less likely to rise in firms with high institutional holdings.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 3 , September 2006 , pp. 637 - 660
Copyright
Copyright © School of Business Administration, University of Washington 2006

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