Professional Documents
Culture Documents
and Extension
Author(s): Clarence C. Y. Kwan
Source: The Journal of Financial and Quantitative Analysis, Vol. 16, No. 2 (Jun., 1981), pp.
193-206
Published by: Cambridge University Press on behalf of the University of Washington School of
Business Administration
.
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EFFICIENT
Clarence
Introduction
I.
In recent
regarding
considerable
various
studies,
Because
of the close
control
[8]
of the dispute
issue
porate
potential
quarterly
filtering
dividend
information
of information
contributed
process
based
to Watts'
on the concept
of prediction
to settle
results,
this
the standard
are
intervals.
to incor-
problem
of empirical
is
Lint?
to identify
refined
the potential
noise
and
methodology.
First,
study)
Second,
substantially
announcement
in Watts'
data.
challenge.
and dividend
Watts'
here.
models
dividend
by
on the identification
and extends
considered
and dividend
earnings
misclassification
which may have
annual
[4]
are
nontriviality
In an attempt
information.
earnings
issues
earnings
centered
has
literature
of dividends.
a formidable
represents
study evaluates
the present
and Fama-Babiak
the firm's
[13]
content
of dividend
of the firm's
proximity
Three methodological
ner
support
of contemporaneous
controversy,
of the informational
the major
has
controversy
evidence
the empirical
Despite
dates,
a major
years
treated
Third,
of
models,
by a
this
193
an aspect
study emphasizes
of dividend
information
formation,
including
Even if
riding
fied
these
Watts'
observed
using
earnings
announcement,
its
tify
this
study addresses
cation
The above
reacted
increase
favorably
This
to
(unfavorably)
the issue
raises
as
forms to iden?
The present
complication.
the implications
by exploring
and
change
of the firm's
and Fama-Babiak
an unnecessary
is
free
classi?
[1]
of a dividend
a period
(decrease).
of the Lintner
information
considerations
methodological
The sample
II.
are
results
pirical
classifi?
of different
used
in this
presented
in further
details
is
described
in Section
III.
study
in Section
discussed
are
IV.
V concludes
Section
Finally,
Em?
investigation.
A Revised
II.
A.
to the sign
one over-
remains
during
issue
of in?
sources
schemes.
in Section
this
data
there
resolved,
Recently,
according
return
empirical
the isolation
namely,
available
publicly
that,
dividend
potential
are
issues
naively
of a dividend
announcement
to whether using
other
methodology.
stock
daily
methodology,
information.
methodological
information
dividend
in Watts'
earnings
about
concern
ignored
of Identifying
Problems
Although
generally
unsuitable
announcements.
during
adequate
Regardless
the firm's
fiscal
if
of the annual
in Watts'
To obtain
with a quarterly
Fama-Babiak
definition
a test
year,
during
tests
dividend
models
of the fiscal
that
information
solely
announcement,
needs
year
models
by treating
available
could
only
treat
declared
the examination
dur?
change
of mar-
of the information
What is
dividend
the dividend
Unless
quarter,
they are
changes,
a minor adjustment
to be made.
forms are
from quarterly
original
became publicly
on annual
particular
Annual Models
dividend
announcement.
earnings
a more appropriate
annual
annual
based
it were associated
was declared
in their
the information
ket reactions
for explaining
Using
Information
models
of identifying
as
in question
Dividend
Quarterly
and Fama-Babiak
the Lintner
considered
Based
Methodology
associated
to the Lintner
and
to relax
the
required
is
quarters
as one
in these
year
models.
the models
year,
have
the following
"
AeL +- = D~ 4q,t
q,t
(1)
(Lintner)
for each
Then,
will
tive
quarterly
dend D
is
(including
earnings
earnings
ending
^ are
q*t
at quarter
regular
in each
dividends)
Market reactions
q of year
t.
announced
quarterly
with E
contemporaneous
for quarter
q is
four consecu-
terms.
four quarters
The dividend
to the deviation
group according
.
all
model,
common parameters.
four consecutive
mate AD
+ a0E
+ ? E ^ _ + Z
2 q,t^_
3 q,t-l
q,t
2, 3, 4.
models
AD?
2, 3, 4
q = 1,
the moving annual
Here,
forms:
- D . _ = a_D
1 q,t-l
<l't-l
E D
q,t
AD
q,t
fiscal
+ a-D_. 4- -, + ?^E? ^ T
+ Z
D~ +._-, = a_
1 q,t-l
o
2 q,t
q,t-l
q,t
q = 1,
(2)
(FamaBabiak)
of the firm's
actually
can be pooled
q,t
divi?
dividends
In these
to esti?
required
for estimating
the
announcement
is
of the actual
classified
an information
into
ment in question.
B.
Noise
in Regression
A direct
observed
classification
dividend
technique,
explaining
a nonzero
of information
from the fitted
change
may bias
the results
quarterly
dividend
to the inherent
this
[11],
changes.
paper
to identify
dividend
information
the regular
dividend
declared
q, t
since
This
annualized
quarterly
description
of the annual
a dividend
problem
changes
dividend
change
of obfuscating
which is
the ability
by defining
dividend
are
the essence
of Watts'
value
which investors
announcement.
to that
as
can expect
signal
four times
on the grounds
provides
a fairly
195
for
that,
accurate
to receive
when D
imple-
model
announcement
Such a treatment
dividend
be due
of the empirical
can be justified
it
model,
can also
(2)
for
adequate
analogous
in (1) or
D
q, t
of the earnings
infrequent,
the true
of the
model is
In an approach
improves
on the sign
in the quarter
quarterly
dividend
As is
of the model.
randomness
mented by Pettit
value,
based
of the actual
deviation
groups
avoids
is
from
the
defined
as
not declare
extra
gular
to a particular
according
a 95 percent
is
there
this
outside
ment is
as
C.
Isolation
the plausible
Using
that
using
irre-
within
for D
q,t
interval,
this
announcement
the announced
that
the prediction
conveys
from the
signal
probability
cases
inter-
prediction
the potential
however,
remedial
interval
prediction
percent
misclassified
all
falls
the announce?
can serve
interval
- D
of D
q* t
q,t
are
is
information
relevant
news is
from other
sources
those
in
daily
Journal
Index
dividend
of information.
to follow
constrained
reported
under
attainable
empirically
corporate
the reference,
separable
the announcements
fically,
a 2.5
the WSJI as
which are
If,
Therefore,
dividend
assumption
Journal
where
Information
of isolating
to identify
to the sign
according
of Dividend
The goal
nouncements
only
an important
D
falls
q, t
the dividend
either
problem.
to remove potentially
categorized
(WSJI).
is
only a small
are
a filter
the actual
unable
classified.
incorrectly
a filter
groups
there
interval,
to situations
limited
measured,
be a 95 percent
that
of the noise
because
is
to construct
If
probability
or the model is
no information
announcement
model.
considers
payments.
variable
is
or the extras
dividends
dividend
dividend
quarterly
applicability
Regardless
the annualized
its
however,
dividends,
only regular
Since
dividend.
an-
More speci-
the sequential
pattern
below.
E_*_D
Nx
*_N2
time
other
news
Here
* denotes
other
news items
for examining
See,
that
at least
about
daily
for example,
five
excess
other
news
dividend
announcement
earnings
announcement
stock
Theil
reported
returns
[12,
trading
pp.
in the WSJI.
lies
between
points
during
which no
The period
suitable
E and N
in this
134-135]
196
ings
announcement
of its
D labeled
with point
diagram,
earnings
[3],
as
the deviation
R ..
The conclusion
mt
can be reached by examining
section
D.
as
of its
public
earn?
availability
(2).
or the residual
for stock
u.,
daily
of the cumulative
information
residual,
average
group described
in sub-
B above.
Classification
Schemes of Dividend
Models
Lintner and Fama-Babiak
dividend
deviations
scheme depends
dividend
are
changes
(small)
large
the expected
i.e.,
dividend
favorably
to small
dividends
associated
The empirical
versus
Yet,
increases
are
Pettit
adequacy
[10]
in the range
that
the past
with large
to announcements
strongly
changes.
to dividend
are
changes
and weakly
Approach
on whether
changes
unexpected,
Naive
Information:
scheme adopted
classification
and that
dividends,
(small)
(1)
the firm's
that
ensures
or
to whether dividend
the behavior
the announcement
The naive
all
announcement
AD ^ via
q, t
the excess return
return
CAR, around
dividend
The requirement
for estimating
Charest
Following
its
precedes
data
as day 0.
of such a
of large
observed
that
of 10 to 25
announcement day
There is a lag of one trading day between the dividend
and the day when this dividend
news
(as recorded in Moody's Dividend Records)
date is chosen as the reference
i.e.,
appears in the WSJ. The latter
point,
announcement day.
Note also that, because
the length of
day -1 is the public
the period used in the residual
for each announcement is not fixed,
analysis
the number of stocks for the computation of the average residual
becomes fewer
announcement day in
is further from the dividend
as the day under consideration
either direction.
The statistical
of the average
significance
be tested under the assumption
that the individual
residual
excess
be assumed
to be statistically
independent.
197
and unfavorably
percent
dividend
dence
increases
on small
based
for an empirical
Insofar
ought
nounced
dividend
problem,
models
diction
interval
should
be reduced
defined
tion
are
(2)
can be constructed
instead.
quarterly
dividend.
the relationship
between
the degree
can be examined
error
via
the CAR's
should
approach
dividend
identifying
to assess
be able
dividends
data
during
in
and
(1)
calculated
using
stock
(2),
analysis
in
price
Data
up to the quarter
Base
data
market returns
and extra
of estimating
and dividend
group,
To
were based
returns
daily
per
Dividend
and Moody's
under consideration.
information
Hand?
The
(NYSE).
changes
earnings
quarterly
and dividend
Exchange
were
section.
in Moody's
Line
for each
information
dividend
regular
1973-1977.
firm's
and daily
base,
each
of 11 years
the residual
data
This
models
empirical
reported
the period
were collected
facilitate
stitute
to those
declared
for a period
Records
dividend.
in the previous
described
were restricted
and listed
collected
the parameters
share
according
of the actual
of dividend
market tests
methodology
in the sample
constructed
of the actual
is
noise
The Sample
efficient
study,
the revised
using
models
the deviation
of these
problem
information.
In the present
Firms included
of the noise
in these
A pre?
any remaining
Ignoring
the usefulness
III.
performed
market expectations.
variable
of
of the an?
of market reaction
. The latter
to the size of (D ^ - D ,)/D
q,t
q,t
q,t
dividend
from its predicted
value as a fraction
a need
is
the degree
purpose,
The severity
evi?
as de?
more accurately.
Unfortunately,
considerably
there
to pinpoint
unable
to
If Pettit's
Then,
intended
level.
the annualized
as
problems,
and
its
correlated
at all
of dividends
market expectations
serve
adequately
not react
25 percent.
considerably.
can portray
or over
distorted
to be strongly
but did
decreases,
market expectations
valid,
scheme are
as
is
model that
market reaction
dividend
than 10 percent
samples
by the naive
scribed
to all
of less
were
In?
Research
Index.
to the sample
According
of regular
there
sions.
dividend
were only
Empirical
from all
changes
20 cases
dividend,
these
criteria
and extra
dividends
of regular
models
(1)
of this
selection
and
(2),
dividend
announcements.
were collected.
decreases
were initially
used
study,
In the sample,
including
dividend
omis-
variable
measured
by
to identify
Upon replacing
183 announcements
potential
the dividend
198
variable
informa?
in
these
by the annualized
models
dividend
regular
(2),
performed
mation.
affected
almost
was measured.
are
those
in
model
(2)
estimates
with statistically
-a
was negative
the partial
few cases
in the negative
this
There
1(a).
declined
that,
around
sharply
although
was often
appeared
dividend
is
day.
not be as
severe
shown
in
group
indicates
evidence
information
the potential
noise
group as
to the announcements
Such empirical
nontrivial,
should
negative
however,
filtering,
of the inherent
because
of misclassification
group because
positive
After
the announcement
not discernible
The problem
on the sign
to be no market reaction
information
were
cases
seven
by
of dividend
group.
group on average.
negative
These
reflected
was clearly
either
significant,
based
the classification
parameter
as
Insofar
signs.
the fitting
because
to produce
failed
the relatively
20 in total,
correct
significant
analysis.
81 announcements
in Table
historical
using
Despite
data
and
group;
negative
were unclassified
95 in
(i)
categories:
81 in the unfiltered
and statistically
adjustment
eliminated
the following
into
announcements
Seven
here
presented
was measured
variable
(ii)
group;
groups
model.
the Fama-Babiak
fell
(1)
infor?
that mate-
the feature
of the analysis
the results
prior
divi?
models,
dividend
potential
was used,
of information
period
in identifying
well
of
any extra
and Fama-Babiak
the Lintner
that
positive
of the linear
tion
Results
Therefore,
7 unclassified.
or a
Empirical
the unfiltered
(iii)
IV.
equally
involving
In the case
dividend,
consecutively
the classification
variable
only
dividends
Regardless
rially
extra
study
the 11-year
during
cases
consisted
either
under consideration,
dend,
by firms which,
declared
changes
to the announcement
147 cases
These
was reduced
dividend,
quarterly
of the model
involved.
in the sample
were dividend
increases.
Due to the noise
tity
the information
of the filtering
only
a small
the above
from individual
process
problem,
for noise
announcements.
sample
model often
announcements.
removal,
to correctly
Nevertheless,
it was still
Unfortunately,
failed
able
analysis.
Of the 95
199
to pick
the filtering
iden?
process
(81)
up signals
left
announcements
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in the positive
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the 95 percent
The ability
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Table
three
the CAR's
trivial
dividend
any material
in the post-announcement
the filter,
(34 to 16)
less
considerably
severe
were less
creases
useful
the filtered
negative
changes,
group.
strong
dividend
market reactions
not cause
from
was reduced
of dividend
should
in the negative
stronger
usually
sizes
be uneven.
group was
the filter
Hence,
was par?
in
to announcements
than those
involved
were reasonable
de?
in the sample,
mechanism
group.
decreases
did
process
to
Market reactions
Because
counterpart.
ticipated
of the positive
was used
led
increases
cases
of misclassified
for non-
to a substantial
6
announcement day.
it
announcements
of dividend
were
by any classification
classified
than that
to be higher
ticularly
tive
as
the percentage
Furthermore,
likely
than those
frequent
groups
the filter
dividend,
Since
problem.
As shown in
group size
(negative)
group,
In comparison
announcements.
was represented
variable
as
the filtering
the positive
group;
There was
The evidence
period.
positive
and negative
positive
were
changes
from 81 to 34.
category
was
variable.
3 unclassified.
(iii)
change
When using
group;
announcements.
the dividend
dividend
regular
and
information
misclassified
as
information
(i)
in the second
differentiated
reduce
of quarterly
negative
dividend
dividend
quarterly
categories:
reduction
1(b),
clearly
model to identify
the annualized
34 in the unfiltered
(ii)
of these
interval.
prediction
classified
24 (9)
only
of the empirical
by using
(2),
Using
group,
for its
posi?
unan?
substantial
even on an a priori
basis.
The residual
classified
analysis
naively
CAR's
for these
tered
groups
according
two groups
shown in Table
was also
performed
to -the sign
of quarterly
This
finding
dividend
resemble
those
groups
changes.
The
that
dividend
as
changes
for three
analysis
percent,
between
to the percentage
change
the ability
To evaluate
the residual
Since
scheme treats
claim
and over
it
increases
the
of the
less
than 10
study.
Consis?
(i.e.,
dividend.
model in identifying
of the empirical
all
by results
in this
25 percent)
scheme can
distorts
inevitably
was supported
of the quarterly
dividend
was performed
analysis
this
of market reaction
the degree
finding,
concerned,
of dividend
subgroups
10 and 25 percent,
formation,
This
Clearly,
the naive
however,
unanticipated,
totally
information.
potential
is
information.
of market expectations.
description
residual
lated
information
of classifying
the purpose
serve
for identifying
not useful
of dividend
the test
as
insofar
are
models
empirical
in?
positive
- D
was reThe analysis
. < 10 percent.
subgroups according
q*t
q/t^_)/Dq/t
was measured by the annualized
to cases where the dividend variable
stricted
to
dividend.
quarterly
to warrant
(D
ther away is
is
conveyed
tial
impact
misclassification
test
Not surprisingly,
(with 41 announcements)
(with 69 announcements).
The usefulness
joint
2.
This
means that,
lies
above
the fur?
the announced
model to identify
sults.
of the residual
Results
shown in Table
deviations
small
D
the more information
from its expected value,
q/t 7
the
This evidence
indicates
that, despite
by the announcement.
problem,
a material
are
subgroups
of the negative
classification.
of larger
deviations
of smaller
noise
detailed
any meaningful
analysis
the size
Unfortunately,
is
able
returns.
dividend
to identify
Therefore,
information
those
announcements
on an empirical
the reliance
is
useful
in refining
be balanced
A model dependent
which have
against
test
is
the re?
the poten?
ultimately
...
as well as in the positive
Note that, in each of these two subgroups,
groups shown in Table 1, the CAR shows an upward trend in the post-announcement
In fact, the CAR in the subgroup of
market inefficiency.
suggesting
period,
This may be
in the pre-announcement
also increases
period.
larger deviations
dividend
about the unanticipated
information
of valuable
to the leakage
related
are in many
Because of the leakage,
the amounts declared
publicly
changes.
imme?
the average residuals
to investors.
cases
not surprises
Consequently,
The
around the announcement day become statistically
insignificant,
diately
movement of the CAR for the subgroup of smaller devi?
absence of any substantial
that any leaked information prior
ations
in the pre-announcement
period suggests
as that in the other
to public
announcements in this subgroup is not as valuable
in this subgroup is
of no leakage
of information
The interpretation
subgroup.
with the observation
of statistically
consistent
average residuals
significant
on and immediately following
the announcement day, but not prior to the announce?
ment day, for this subgroup.
(See Table 2.)
203
TABLE 2
CUMULATIVE AVERAGE RESIDUALS
EQUATION (2)
[FAMA-BABIAK MODEL:
Day
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
r(#) - The average
residual
is
significantly
nonzero
at
the 0.05
204
(0.01)
level.
V.
In an attempt
cal
were considered
ner or Fama-Babiak
formation
of dividend
formation
in this
annual
dividend
of quarterly
the dispute
of the informational
assessment
issues
to settle
changes;
paper
(which
is
changes.
models
are
Thus,
for identifying
of empirical
treats
all
as
an unnecessary
to portray
dividend
the question
the inherent
able
other
dividend
problem
models;
completely
to whether using
regression
this
some revised
market expectations
caveats,
these
empirical
information.
205
study
nontriviality.
unanticipated),
Upon examining
changes,
problem,
in this
scheme of divi?
classification
as
of in?
sources
evidence
changes
in?
the isolation
(iii)
of dividend
of dividend
adequately
and
held
complication.
noise
of misclassifying
The empirical
position
Lint-
from announcements
available
publicly
of the naive
success
to announcements
notwithstanding
Babiak
noise
considered
also
the potential
methodological
of the standard
information
(ii)
information.
earnings
three
the suitability
(i)
paper:
on the empiri?
literature
of dividends,
content
in the finance
this
Conclusion
models
the degree
study observed
Lintner
and Fama-
of dividend
models
are
useful
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