Pure announcement and time effects in the dividend-discount model

Mikael Bask

The Quarterly Review of Economics and Finance, 2020, vol. 77, issue C, 266-270

Abstract: We conduct an in-depth analysis of how an unexpected, but credible, announced change in the dividend payment affects the evolution of the stock price in the dividend-discount model and distinguish between the pure announcement and time effects on the stock price of the dividend announcement. The pure announcement effect is the immediate change in the stock price and the time effect is the cumulative change in the stock price after its immediate change until the dividend is paid out. Then, if the capital asset pricing model determines the equity cost of capital in the dividend-discount model, the pure announcement effect is smaller and the time effect is larger for stocks with a higher systematic risk. This finding is useful from an investor perspective.

Keywords: Announcement effect; CAPM; DDM; Dividend payment; Stock price; Time effect (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:77:y:2020:i:c:p:266-270

DOI: 10.1016/j.qref.2019.10.009

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