Are certain dividend increases predictable? The effect of repeated dividend increases on market returns

Financial Management Association
Publication Type:
Conference Proceeding
Financial Management Association 2010 Meetings, 2010, pp. 1 - 38
Issue Date:
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Positive abnormal returns around dividend increase announcements are well documented. The conventional explanation for these abnormal returns is that a dividend increase conveys favorable information about a firms prospects causing the stock price to increase in response to the announcement. This study offers a new perspective by studying a special group of firms that consistently increase their dividends each year. Abnormal returns around each dividend increase announcement are investigated based on the number of consecutive annual increases. In light of survey results that indicate firms endeavor to maintain steady dividend payments, one hypothesis is that after a certain number of dividend increases, a firm may develop a reputation as a dividend-increasing firm and consequently the market will learn to anticipate future dividend increases. Consistent with this hypothesis, we find that abnormal returns are significantly positive for the first and second dividend increase. Returns are not significant for all other increases, with the exception of the ninth consecutive increase. Our results suggest that, by the third consecutive increase, the market has learned to expect further increases. Our findings are robust and provide further evidence that, consistent with other types of corporate announcements, the stock market reacts differently depending on the frequency of an action.
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