Dividend initiation announcements effects in initial public offerings

Abstract

This paper examines the market reaction to dividend initiation announcements by Initial Public Offerings (IPOs) in the UK. Using data for 131 Official Listed (OL) and 139 Unlisted Securities Market (USM) firms, covering the period 1982–1991, the study finds a positive market reaction to such announcements. Employing a random walk and random walk with a drift models to generate earnings expectations, the study finds that unexpected earnings are significantly positively related to the announcement day abnormal return, with unexpected dividends positive and significant, for the OL sample only. Contrary to prior research, no evidence of an ‘interaction effect’ between earnings and dividends signals is reported.

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