Stock market reactions to dividend announcements: an event study of the Norwegian capital market

Abstract

The dividend signaling hypothesis is one of the most prominent theories attempting to explain why firms distribute dividends. This study investigates the Norwegian stock markets reactions to dividend change announcements of firms listed on the Oslo Stock Exchange during the period January 2007 to March 2013. The majority of previous research within this area has been conducted using U.S. data. This study attempts to investigate whether the empirical results from the U.S. also apply to the Norwegian stock market where the tax system as well as other institutional and economic characteristics is significantly different. Knowledge of the impacts of dividend changes is of importance to managers of Norwegian listed firms, investors and other market participants. The results show that announcements of dividend increases are associated with insignificant increased stock prices, while announcements of dividend decreases are associated with significant decreased stock prices. These results are in line with the dividend signaling proposition and contradict the tax-based signaling proposition, which states that higher taxes on dividends relative to capital gains are a necessity for dividends to be informative.