Do dividend initiations signal a reduction in risk? Evidence from the option market

Jeffrey Jones (), Jenny Gu () and Pu Liu ()

Review of Quantitative Finance and Accounting, 2014, vol. 42, issue 1, 143-158

Abstract: We investigate whether dividends convey information about the risk of a company by examining the reaction of implied volatility in the option market to the announcement of a dividend initiation. Implied volatility decreases after the announcement and the magnitude of the decline in volatility is positively related to both the magnitude of cumulative abnormal returns (CAR) in the equity markets and the size of the dividend. Additionally, firms with weaker (stronger) corporate governance experience larger (smaller) declines in implied volatility. Cross sectional analysis shows that a one-standard deviation decline in measures of risk increases the 2-day CAR by 74–137 basis points. Our results suggest that dividend initiations signal declining firm risk. Copyright Springer Science+Business Media New York 2014

Keywords: Dividends; Risk; Implied volatility; Initiations; G10; G14; G35 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11156-012-0337-5

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