The Information Content of Dividends: An Empirical Analysis of Warrants Conducted by Examination of the Implied Variability of Stock Prices
Sefcik, Stephan Edward, Ii
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https://hdl.handle.net/2142/71376
Description
Title
The Information Content of Dividends: An Empirical Analysis of Warrants Conducted by Examination of the Implied Variability of Stock Prices
Author(s)
Sefcik, Stephan Edward, Ii
Issue Date
1983
Department of Study
Accountancy
Discipline
Accountancy
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Accounting
Abstract
This study examines the information content of dividends by employing a warrant-adjusted version of the option pricing model. Information content is defined as a statistical dependency in the contemporaneous relationship between security returns (and their implied standard deviations) and the dividend announcement. The relationship of firm size (as determined by market value) to stock variability is concurrently examined. This experiment, staged in event-time, employs an ex-ante methodology which is couched in two versions of the equilibrium option pricing relation. An iterative numerical analysis procedure is used to generate a time series of implied standard deviations. The information arrival process modelled in this study predicts that the behavior of these implied standard deviations in the time periods prior to, during, and immediately after announcement of a dividend should be characterized as increasing, decreasing, and constant, respectively. For the last dividend announcement prior to the expiration of the warrant, the empirical results of this study generally support the information-content-of-dividends hypothesis. For the second-to-last dividend announcement, the empirical results are not as supportive. The relatively longer time-to-expiration parameter appears to produce a dampening effect on the models' performance. Although the small and large firms' reactions to the dividend announcement are not significantly different from one another, the relative magnitude of effect is consistently greater for the small-firm subset. This empirical regularity suggests the dividend annoncement impacts differently on the common stock variability of firms related to their size. The power of most previous empirical tests of the information-content-of-dividends hypothesis was predicated on a significantly large change in dividend behavior. In addition, those tests looked to actual signal realization to drive a shift in the firm's mean stock price. This study, on the other hand, examines the information content of dividends, per se, not changes in dividends. In addition, the ex-ante anticipation of that signal is hypothesized to drive an increase in stock price variability. In general, the results reported here suggest the dividend announcement conveys information useful to capital market agents in making their investment decisions.
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