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The Dividend Month Premium

Last Updated on 10 February, 2024 by Rejaul Karim

In the captivating realms of financial markets, the mysterious dance of dividends takes center stage in Samuel M. Hartzmark and David H. Solomon’s exploration of the “Dividend Month Premium.” Unveiled within the pages of the Journal of Financial Economics, this anomaly unravels over 55 thought-provoking pages, challenging the conventional narrative of risk-based explanations.

Beyond the realm of predictable dividends lies a distinct asset-pricing puzzle, where companies bask in positive abnormal returns during months of dividend predictions. The anomaly, akin to the size of the value premium but less volatile, hints at a symphony of price pressure orchestrated by dividend-seeking investors.

As liquidity and dividend demand weave into the narrative, this anomaly emerges as a nuanced melody, echoing through the corridors of market efficiency and return predictability.

Abstract Of Paper

We document an asset-pricing anomaly whereby companies have positive abnormal returns in months when a dividend is predicted. Abnormal returns in predicted dividend months are high relative to other companies, and relative to dividend-paying companies in months without a predicted dividend, making risk-based explanations unlikely. The anomaly is as large as the value premium, but less volatile. The premium is consistent with price pressure from dividend-seeking investors. Measures of liquidity and demand for dividends are associated with larger price increases in the period before the ex-day (when there is no news about the dividend), and larger reversals afterwards.

Original paper – Download PDF

Here you can download the PDF and original paper of The Dividend Month Premium.

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Author

Samuel M. Hartzmark
Boston College – Carroll School of Management

David H. Solomon
Boston College – Carroll School of Management

Conclusion

Samuel M. Hartzmark and David H. Solomon uncover a fascinating anomaly in the Dividend Month Premium. Spanning 55 pages, their research reveals that companies enjoy positive abnormal returns during predicted dividend months, a phenomenon not easily explained by traditional risk factors.

This anomaly, akin to the value premium in magnitude but less volatile, suggests the influence of price pressure from dividend-seeking investors. The study delves into liquidity measures and dividend demand, intricately woven into the dynamics around the ex-day.

Beyond challenging conventional wisdom, this research enriches our understanding of market efficiency, shedding light on the intricate interplay of dividends, mispricing, and return predictability.

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FAQ

Q1: What is the main focus of Samuel M. Hartzmark and David H. Solomon’s research on the “Dividend Month Premium”?

A1: The research focuses on documenting an asset-pricing anomaly known as the “Dividend Month Premium.” This anomaly reveals that companies experience positive abnormal returns during months when a dividend is predicted. The study aims to understand the nature of this anomaly and its implications for asset pricing.

Q2: How does the Dividend Month Premium anomaly challenge conventional explanations, particularly in terms of risk-based factors?

A2: The anomaly challenges risk-based explanations, as the positive abnormal returns in predicted dividend months are high relative to other companies and relative to dividend-paying companies in months without a predicted dividend. This finding makes traditional risk-based explanations less likely, leading the authors to explore alternative factors influencing the anomaly.

Q3: What does the research suggest about the nature of the Dividend Month Premium and its magnitude compared to other anomalies?

A3: The Dividend Month Premium is described as being as large as the value premium but less volatile. This suggests that, similar to the value premium, there is a distinct anomaly associated with dividends. The research explores the role of price pressure from dividend-seeking investors and examines measures of liquidity and demand for dividends in understanding the dynamics around the ex-day.

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