Reasoning and Theory:
According to the research that we have done, an announcement of dividends can be interpreted by the market in several ways.Â For one, it can be seen as the firm generating enough revenue to pay off debt and increase shareholderâs wealth.Â However it can also be seen as the company not reinvesting in the business.Â In addition to this investors with a large tax bracket will see the dividend as unfavorable while some investors may prefer the regular payments.
When earnings are announced, this informs the public of the firmâs overall performance.Â Based on this information, several stockholders determine where to invest.Â If earnings are below than what was forecasted the stock price can experience a decline.
We found that there was no significant research completed that identified the difference between the effects of dividend and earnings announcements on stock prices. However, as mentioned about, therehas been research done on how these individual factors effect stock prices. Therefore, we decided to conduct an empirical research that identifies this difference between the two factors in stock price performance.
- Pettit, R. Richardson. “The Impact of Dividend and Earnings Announcements: A Reconciliation.” The Journal of Business (1976)