Anomalous evidence in dividend announcement effect

Abeyratna Gunasekarage, David M. Power

Research output: Contribution to journalArticleResearchpeer-review

23 Citations (Scopus)


Purpose – This paper seeks to examine the long-run financial and return performance of UK companies which are grouped according to whether or not they have changed their dividends and earnings. Prior research has been conducted using US data and they are limited to extreme dividend changes such as dividend initiations and omissions. They have also arrived at contradicting results; some report a drift in performance, while others document evidence of mean reversion in performance. The current paper hopes to resolve this conflict using data for a large sample of UK firms which disclosed more general changes in dividends and earnings. Design/methodology/approach – The aims of the paper are addressed using a stock market-based study of share price performance and a detailed analysis of company performance based on financial ratios. These analyses are conducted from five years before to five years after the announcement of dividend/earnings news. Findings – At the time of the announcements, share returns tend to be positive (negative) where companies have increased (decreased) the dividend and earnings. There is also evidence to suggest that the stock market has anticipated some of this news in the preceding 12 months. However, the dividend/earnings news does not appear to act as a signal of long-term future company performance; companies which cut this dividend and reported lower earnings achieved the largest excess returns over the next five years. A similar mean-revealing pattern existed in the financial ratios. Finally, most of the future long-term share performance was attributable to the earnings rather than to the dividend news. Research limitations/implications – The main implication of this research is that current dividend/earnings news is not a good guide to future company performance. Indeed, it is these firms which cut their dividends along with reporting a reduction of earnings which achieve excellent results over a subsequent five-year period. Of course, there are a number of limitations with the research; it draws on data from two previous studies, looks only at the UK and does not consider sophisticated models of investors' expectations with regard to dividend and earnings information. Originality/value – The main contribution of this paper is the long-run analysis of UK company performance following joint dividend-earnings announcements. The analysis is comprehensive in that it considers both stock market performance as well as financial ratio performance for a period of up to five years following the dividend-earnings news. Thus, it should be of interest to most UK investors as well as to financial managers with large quoted firms. Academics will also be interested in the results since they shed some light on an existing debate in the literature.

Original languageEnglish
Pages (from-to)209-226
Number of pages18
JournalManagerial Finance
Issue number3
Publication statusPublished - 1 Mar 2006
Externally publishedYes


  • Dividends
  • Financial performance
  • Returns

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