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Sensitivity of Investor Reaction to Market Direction and Volatility: The Case of Dividend Change Announcements
Koch, Paul D. Docking, Diane Scott
Koch, Paul D.
Docking, Diane Scott
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Abstract
This study examines whether investor reactions are sensitive to the recent direction and/or
volatility of underlying market movements. We find dividend change announcements elicit a
greater change in stock price when the nature of the news (good or bad) goes against the grain of
the recent market direction during volatile times. For example, announcements to lower
dividends elicit a significantly greater decrease in stock price when market returns have been up
and more volatile. Similarly, announcements to raise dividends tend to elicit a greater increase
in stock price when market returns have been normal or down and more volatile, although this
latter tendency lacks statistical significance. We suggest an explanation for these results that
combines the implications of a dynamic rational expectations equilibrium model with behavioral
considerations that link the responsiveness of investors to market direction and volatility.
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2004-02
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Keywords
Dividend policy, Rational expectations, Overreaction, Behavioral finance
Citation
Docking, Diane Scott and Paul D. Koch. Sensitivity of Investor Reaction to Market Direction and Volatility: The Case of Dividend Change Announcements, February 2004.