Do Dividend Clienteles Explain Price Reactions to Dividend Changes?

Previous studies find that stock price reactions to dividend announcements are positively related to dividend yield, consistent with the dividend-clientele hypothesis. In this paper, we argue that this yield-related clientele effect can be attributed to estimation biases in using preannouncement dividends as a proxy for market's anticipated dividends. Based on our samples constructed to mitigate the dividend estimation biases, we find that dividend yield has no additional power beyond the standardized dividend change in explaining the announcement-period excess returns. Our results are consistent with the information/signaling hypothesis, but inconsistent with the dividend-clientele hypothesis. In addition, we find that firm size remains negatively related to the price reactions to dividend changes