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INFORMATION ASYMMETRY, DIVIDEND STATUS, AND SEO ANNOUNCEMENT‐DAY RETURNS
Author(s) -
Booth Laurence,
Chang Bin
Publication year - 2011
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2010.01287.x
Subject(s) - dividend , information asymmetry , extant taxon , financial economics , abnormal return , equity (law) , shareholder , economics , stock (firearms) , stock market , dividend policy , stock price , monetary economics , empirical research , business , finance , stock exchange , corporate governance , mechanical engineering , paleontology , philosophy , horse , epistemology , evolutionary biology , series (stratigraphy) , political science , law , biology , engineering
We analyze the relation between the dividend‐paying status of a firm and the seasoned equity offering (SEO) announcement‐day return. Asymmetric information theory suggests there should be a positive relation: the larger the disagreement, particularly between managers and shareholders, the larger the price drop on the SEO announcement day. However, this theoretical result has not been supported by prior empirical research. In this article we reconcile the gap between the theory and extant empirical results by identifying a structural change in the way the stock market treats dividend‐paying firms. Since the mid‐1980s the difference in information asymmetry between dividend‐ and non‐dividend‐paying firms has increased sharply. As a result, before the mid‐1980s the market did not differentiate strongly between them, but subsequently the market has reacted less negatively to announcements by dividend payers.