THE DECLINING INFORMATION CONTENT OF DIVIDEND ANNOUNCEMENTS AND THE EFFECT OF INSTITUTIONAL HOLDINGS

Abstract

We propose an explanation for the “disappearing dividend” phenomenon: the decline in the information content of dividend announcements. It reduces the propensity of firms to pay or increase dividends, since dividends are costly. A reason for the decline in the information content of dividends is the rise in holdings by institutional investors that are more sophisticated and informed. We indeed find a decline in CAR at dividend change announcements since the mid 1970s. Across firms, CAR declines in institutional holdings. Exploiting their superior information, institutional investors buy before dividend increases and sell afterwards. And, dividends are less likely to rise in firms with high institutional holdings.