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TARGET PAYOUT AND THE ASSOCIATION BETWEEN DIVIDENDS AND SHARE PRICES *
Author(s) -
Roy S. Paul,
Cheung Joseph K.
Publication year - 1985
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.1985.tb00140.x
Subject(s) - dividend , dividend payout ratio , econometrics , economics , share price , financial economics , dividend policy , metric (unit) , dividend yield , monetary economics , stock exchange , finance , operations management
The hypothesis that share prices react differently to unexpected dividend changes conditional upon firm target payouts is examined empirically. The cumulative abnormal return metric is used to measure price reactions for firms in various combinations of target payout class and dividend change. Two models are used as surrogates for expected dividends: the Fama‐Babiak model and one using analyst dividend forecasts. In general, the information hypothesis is not supported in the case of unexpected dividend decrease, but target payout is found to be a significant explanatory variable of share price behaviour in the case of unexpected dividend increase.