Doron Nissim

Discussion of Reactions to Dividend Changes Conditional on Earnings Quality

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Abstract:
The article examines the price implications of corporate disclosures as well as other information releases. Corporate disclosures are an important source of information for investors. For dividend announcements, the price implications appear straightforward: price is the present value of expected future dividends. Hence, to the extent that future dividends are related to current dividends, dividend changes should trigger price responses. Other corporate disclosures, such as earnings, may also be viewed as proxies for future dividends. So, it is implied that the price reaction to a particular disclosure should increase in the difference between the implied equity value based on that disclosure and price prior to the disclosure. The magnitude of price reaction should also increase in the precision of the disclosure and decrease in the precision of all prior price-related information. However, most empirical studies do not explicitly account for this effect.

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