Repeated Dividend Increases: A Collection of Four Essays

This thesis investigates firms with patterns of repeated cash dividend increases to answer two research questions. First, are firms rewarded for this particular type of dividend policy, and second, is there any evidence to support the hypothesis that the stock market learns to anticipate a dividend increase based on past history? Dividends are a particularly good corporate action to study because firms tend to increase dividends over time, and at regular intervals. This repetition leads to patterns of regularly-occurring dividend increases, which in some cases can extend for many decades. The analysis is presented in a collection of four essays. The first essay documents the prevalence of firms that sustain a pattern of consecutive annual dividend increases. These firms attract a stock market premium, providing evidence to support the belief that a steady dividend policy is rewarded. The next two essays further explore firms with a habit of regularly increasing the dividend to determine if the market eventually learns to expect future dividend increases. The second essay studies U.S. firms and Australian firms are investigated in the third essay. For both countries the stock market reaction to each consecutively-numbered increase within a pattern is different across each increase, with a smaller stock price reaction the more often the increase is repeated. The fourth, and final, essay examines firms that fail to continue an established dividend-increase pattern. A firm may be expected to maintain the same dividend-increase schedule, and the expectation should be higher the longer the length of the established pattern. When the pattern is interrupted and the expected increase does not eventuate, the stock market reaction is expected to be more pronounced the longer the length of the established pattern. The results presented in the last three essays provide evidence consistent with the market learning hypothesis. Combined, the four essays suggest that the stock market evaluates the information contained in a dividend announcement in conjunction with the length and pattern of past dividend payments.