Market rationality and dividend announcements

Abstract

We investigate stock market rationality by examining the timeliness and unbiasedness of the market's response to dividend announcements. Our initial findings for market timeliness show a sluggish market reaction to dividend announcements; however, when the ex-dividend effect is controlled for, we find no evidence of a sluggish market reaction. We examine the unbiasedness of the market's response by testing whether the net announcement effect across a sample that is devoid of ex-post selection bias sums to zero. We observe a significant positive net announcement effect and examine several plausible conjectures for this puzzling phenomenon, but none provides a satisfactory explanation.