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Dividend Increases and Initiations and Default Risk in Equity Returns

Published online by Cambridge University Press:  23 May 2011

Andreas Charitou ,
Neophytos Lambertides  and
Giorgos Theodoulou
Andreas Charitou
Affiliation:
Department of Public and Business Administration, University of Cyprus, PO Box 20537, Nicosia, CY 1678, Cyprus, [email protected]
Neophytos Lambertides
Affiliation:
Business School, Aston University, Aston Triangle, Birmingham, B47ET, United Kingdom. [email protected]
Giorgos Theodoulou
Affiliation:
Department of Public and Business Administration, University of Cyprus, PO Box 20537, Nicosia, CY 1678, Cyprus, [email protected]
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Abstract

This study extends the Grullon, Michaely, and Swaminathan (2002) analysis by incorporating default risk. Using data for firms that either increased or initiated cash dividend payments during the 23-year period 1986–2008, we find reduction in default risk. This reduction is shown to be a priced risk factor beyond the Fama and French (1993) risk measures, and it explains the dividend payment decision and the positive market reaction around dividend increases and initiations. Further analysis reveals that the reduction in default risk is a significant factor in explaining the 3-year excess returns following dividend increases and initiations.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 5 , October 2011 , pp. 1521 - 1543
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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