Market Reaction to Dividend Initiations and Information Asymmetry
Author: Jongchai Kim
Department of Business Administration, College of Professional Studies& Education of Mississippi Valley State University, Itta Bena, MS
Co-Author: Jouahn Nam
Lubin School of Business, Pace University, New York, NY
This paper examines the relation between the market reaction to the announcement of dividend initiations and the degree of information asymmetry between forms’ insiders and the market. We start with the hypothesis that the higher the degree of information asymmetry, the harder it is for the firms to anticipate events such as dividend initiation. Thus, the magnitude of the announcement response should be greater for firms with higher information asymmetry. Our results support this hypothesis. We find a positive relation between information asymmetry and the market reaction to dividend initiations. We also investigate the question of what information is revealed by dividend initiations. Similar to the results of previous studies, we find that dividend initiations signal a reduction in the firm risk.
Presented at the Global Business Development Institute (GBDI) Conference in Las Vegas, NV on March 20-23, 2011