The Declining Information Content of Dividend Announcements and the Effects of Institutional Holdings

Yakov Amihud and Kefei Li

Journal of Financial and Quantitative Analysis, 2006, vol. 41, issue 3, 637-660

Abstract: We propose an explanation for the “disappearing dividend” phenomenon: a decline in the information content of dividend announcements, which reduces the propensity of firms to use dividends as a costly signal. A reason for a decline in the information content of dividends is the rise in holdings by institutional investors that are more sophisticated and informed. Indeed, we find a decline in CAR at dividend change announcements since the mid–1970s. Across firms, CAR is a decreasing function of institutional holdings. Institutional investors exploit their superior information and buy before dividend increases. In addition, dividends are less likely to rise in firms with high institutional holdings.

Date: 2006
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