AMUEL M. HARTZMARK, DAVID H. SOLOMON
THE DIVIDEND MONTH
PREMIUM
(2013)
, MAIN IDEA
The main question of the paper is whether stocks earn abnormally high returns in the months when a firm
is expected to pay a dividend, and if so, what explains this pattern.
The authors find a strong effect: stocks generate positive abnormal returns in predicted dividend months.
Importantly, these returns are not only higher compared to all other stocks in the market, but also higher
than the returns of the same dividend-paying firms in months when no dividend is expected. This result is
difficult to explain using standard risk-based explanations.
The authors argue that the most likely explanation is price pressure from dividend-seeking investors.
Before the ex-dividend date, investors who want to capture the dividend increase demand for the stock. If
arbitrageurs and liquidity providers do not fully offset this demand, stock prices are pushed upward before
the ex-dividend date and partially reverse after the dividend is paid.
, MOTIVATION
Traditional finance models typically assume perfect liquidity, meaning investors can buy or sell any amount of
a stock without affecting its price.
However, empirical evidence suggests that demand curves for stocks are downward sloping. When demand
for a stock temporarily increases, its price may rise even without new information about fundamentals.
Prior literature documents such price pressure around events like index inclusions, where increased demand
from index investors pushes stock prices upward.
This paper asks a related question:
If demand shifts in a predictable and temporary way, such as around dividend payments, can this also move
stock prices?
This is important because dividend payments are regular, visible, and predictable, which makes this setting a
strong test of market efficiency.
THE DIVIDEND MONTH
PREMIUM
(2013)
, MAIN IDEA
The main question of the paper is whether stocks earn abnormally high returns in the months when a firm
is expected to pay a dividend, and if so, what explains this pattern.
The authors find a strong effect: stocks generate positive abnormal returns in predicted dividend months.
Importantly, these returns are not only higher compared to all other stocks in the market, but also higher
than the returns of the same dividend-paying firms in months when no dividend is expected. This result is
difficult to explain using standard risk-based explanations.
The authors argue that the most likely explanation is price pressure from dividend-seeking investors.
Before the ex-dividend date, investors who want to capture the dividend increase demand for the stock. If
arbitrageurs and liquidity providers do not fully offset this demand, stock prices are pushed upward before
the ex-dividend date and partially reverse after the dividend is paid.
, MOTIVATION
Traditional finance models typically assume perfect liquidity, meaning investors can buy or sell any amount of
a stock without affecting its price.
However, empirical evidence suggests that demand curves for stocks are downward sloping. When demand
for a stock temporarily increases, its price may rise even without new information about fundamentals.
Prior literature documents such price pressure around events like index inclusions, where increased demand
from index investors pushes stock prices upward.
This paper asks a related question:
If demand shifts in a predictable and temporary way, such as around dividend payments, can this also move
stock prices?
This is important because dividend payments are regular, visible, and predictable, which makes this setting a
strong test of market efficiency.
