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In this paper, we assess the long-term stock price impact of 1327 cash dividend payment initiations and 1156 cash dividend payment omissions of firms listed on the NYSE and the NASDAQ, from 1972 to 2012. In particular we compare the annual returns of dividend initiating and omitting firms and firms that are equally likely to initiate (or omit). We find larger price effects during the years of cash dividend initiation and omission than is measured by earlier short period event studies, but we find no price impact after the year has elapsed. When measuring such long-run effects, contemporaneous (same year) determinants of price effects may confound the findings of pure dividend initiations or omissions. We therefore test whether there are also unexpected changes in the contemporaneous determinants of returns, and we find that risk measures and net income differ systematically between firms that initiate (or omit) and firms that have similar characteristics, but do not change their payout policy. When correcting for such effects we find that systematic risk does not influence concurrent returns in the years of initiations or omissions, though total risk does. Idiosyncratic risk changes only influence the returns after dividend omissions. With and without correction for ‘contemporaneous’ factors, we find –also for several robustness tests- that the one year price impact of initiations is larger than that of omissions, which suggests that the surprise effects of dividend omissions are on average smaller than those of dividend initiations.

Do Annual Stock Price Effects of Extreme Cash Dividend Pay-Out Events Differ from Their Short Term Effects?