The Journal of Finance

Ex‐Dividend Day Stock Price Behavior: The Case of the 1986 Tax Reform Act*

Published: 07/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb03768.x

RONI MICHAELY

This paper analyzes the behavior of stock prices around ex‐dividend days after the implementation of the 1986 Tax Reform Act that dramatically reduced the difference between the tax treatment of realized long‐term capital gains and dividend income in 1987 and completely eliminated the differential in 1988. We show that this tax change had no effect on the ex‐dividend stock price behavior, which is consistent with the hypothesis that long‐term individual investors have no significant effect on ex‐day stock prices during this time period. The results indicate that the activity of short‐term traders and corporate traders dominates the price determination on the ex‐day.

Institutional Holdings and Payout Policy

Published: 05/03/2005   |   DOI: 10.1111/j.1540-6261.2005.00765.x

YANIV GRINSTEIN, RONI MICHAELY

We examine the relation between institutional holdings and payout policy in U.S. public firms. We find that payout policy affects institutional holdings. Institutions avoid firms that do not pay dividends. However, among dividend‐paying firms they prefer firms that pay fewer dividends. Our evidence indicates that institutions prefer firms that repurchase shares, and regular repurchasers over nonregular repurchasers. Higher institutional holdings or a concentration of holdings do not cause firms to increase their dividends, their repurchases, or their total payout. Our results do not support models that predict that high dividends attract institutional clientele, or models that predict that institutions cause firms to increase payout.

The Information Content of Share Repurchase Programs

Published: 03/25/2004   |   DOI: 10.1111/j.1540-6261.2004.00645.x

Gustavo Grullon, Roni Michaely

Contrary to the implications of many payout theories, we find that announcements of open‐market share repurchase programs are not followed by an increase in operating performance. However, we find that repurchasing firms experience a significant reduction in systematic risk and cost of capital relative to non‐repurchasing firms. Further, consistent with the free cash‐flow hypothesis, we find that the market reaction to share repurchase announcements is more positive among those firms that are more likely to overinvest. Finally, we find evidence to indicate that investors underreact to repurchase announcements because they initially underestimate the decline in cost of capital.

Dividends, Share Repurchases, and the Substitution Hypothesis

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00474

Gustavo Grullon, Roni Michaely

We show that repurchases have not only became an important form of payout for U.S. corporations, but also that firms finance their share repurchases with funds that otherwise would have been used to increase dividends. We find that young firms have a higher propensity to pay cash through repurchases than they did in the past and that repurchases have become the preferred form of initiating a cash payout. Although large, established firms have generally not cut their dividends, they also show a higher propensity to pay out cash through repurchases. These findings indicate that firms have gradually substituted repurchases for dividends. Our results also suggest that before 1983, regulatory constraints inhibited firms from aggressively repurchasing shares.

The Making of a Dealer Market: From Entry to Equilibrium in the Trading of Nasdaq Stocks

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00496

Katrina Ellis, Roni Michaely, Maureen O'Hara

This paper provides an analysis of the nature and evolution of a dealer market for Nasdaq stocks. Despite size differences in sample stocks, there is a surprising consistency to their trading. One dealer tends to dominate trading in a stock. Markets are concentrated and spreads are increasing in the volume and market share of the dominant dealer. Entry and exit are ubiquitous. Exiting dealers are those with very low profits and trading volume. Entering market makers fail to capture a meaningful share of trading or profits. Thus, free entry does little to improve the competitive nature of the market as entering dealers have little impact. We find, however, that for small stocks, the Nasdaq dealer market is being more competitive than the specialist market.

Does the Scope of the Sell‐Side Analyst Industry Matter? An Examination of Bias, Accuracy, and Information Content of Analyst Reports

Published: 01/20/2017   |   DOI: 10.1111/jofi.12485

KENNETH MERKLEY, RONI MICHAELY, JOSEPH PACELLI

We examine changes in the scope of the sell‐side analyst industry and whether these changes impact information dissemination and the quality of analysts’ reports. Our findings suggest that changes in the number of analysts covering an industry impact analyst competition and have significant spillover effects on other analysts’ forecast accuracy, bias, report informativeness, and effort. These spillover industry effects are incremental to the effects of firm level changes in analyst coverage. Overall, a more significant sell‐side analyst industry presence has positive externalities that can result in better functioning capital markets.

Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

Published: 06/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04796.x

RONI MICHAELY, RICHARD H. THALER, KENT L. WOMACK

This article investigates market reactions to initiations and omissions of cash dividend payments. Consistent with prior literature we find that the magnitude of short‐run price reactions to omissions are greater than for initiations. In the year following the announcements, prices continue to drift in the same direction, though the drift following omissions is stronger and more robust. This post‐dividend initiation/omission price drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples earns positive returns in 22 out of 25 years. We find little evidence for clientele shifts in either sample.

Do Changes in Dividends Signal the Future or the Past?

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02723.x

SHLOMO BENARTZI, RONI MICHAELY, RICHARD THALER

Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. We investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years −1 and 0, but show no subsequent unexpected earnings growth. Also, the size of the dividend increase does not predict future earnings. Firms that cut dividends in year 0 have experienced a reduction in earnings in year 0 and in year −1, but these firms go on to show significant increases in earnings in year 1. However, consistent with Lintner's model on dividend policy, firms that increase dividends are less likely than nonchanging firms to experience a drop in future earnings. Thus, their increase in concurrent earnings can be said to be somewhat “permanent.” In spite of the lack of future earnings growth, firms that increase dividends have significant (though modest) positive excess returns for the following three years.

When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00240

Katrina Ellis, Roni Michaely, Maureen O'Hara

This paper examines aftermarket trading of underwriters and unaffiliated market makers in the three‐month period after an IPO. We find that the lead underwriter is always the dominant market maker; he takes substantial inventory positions in the aftermarket trading, and co‐managers play a negligible role in aftermarket trading. The lead underwriter engages in stabilization activity for less successful IPOs, and uses the overallotment option to reduce his inventory risk. Compensation to the underwriter arises primarily from fees, but aftermarket trading does generate positive profits, which are positively related to the degree of underpricing.

The Structure of Spot Rates and Immunization

Published: 06/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb03708.x

EDWIN J. ELTON, MARTIN J. GRUBER, RONI MICHAELY

Empirical studies of the modern theories of bond pricing typically choose proxies for the state variables in a rather arbitrary fashion. This paper empirically analyzes the question of the optimal spot rates to use as state variables. Our findings indicate that the four‐year spot rate serves as the best proxy in the one‐state‐variable model. In the case of the two‐state‐variables model, the six‐year rate and eight‐month rate are identified as best. Tests of the out‐of‐sample prediction ability indicate that our model is superior to Macaulay's duration model and alternative proxies for state variables.

Caveat Compounder: A Warning about Using the Daily CRSP Equal‐Weighted Index to Compute Long‐Run Excess Returns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.165353

Linda Canina, Roni Michaely, Richard Thaler, Kent Womack

This paper issues a warning that compounding daily returns of the Center for Research in Security Prices (CRSP) equal‐weighted index can lead to surprisingly large biases. The differences between the monthly returns compounded from the daily tapes and the monthly CRSP equal‐weighted indices is almost 0.43 percent per month, or 6 percent per year. This difference amounts to one‐third of the average monthly return, and is large enough to reverse the conclusions of a paper using the daily tape to compute the return on the benchmark portfolio. We also investigate the sources of these biases and suggest several alternative strategies to avoid them.

Do Price Discreteness and Transactions Costs Affect Stock Returns? Comparing Ex‐Dividend Pricing before and after Decimalization

Published: 11/07/2003   |   DOI: 10.1046/j.1540-6261.2003.00617.x

John R. Graham, Roni Michaely, Michael R. Roberts

By the end of January 2001, all NYSE stocks had converted their price quotations from 1/8s and 1/16s to decimals. This study examines the effect of this change in price quotations on ex‐dividend day activity. We find that abnormal ex‐dividend day returns increase in the 1/16 and decimal pricing eras, relative to the 1/8 era, which is inconsistent with microstructure explanations of ex‐day price movements. We also find that abnormal returns increase in conjunction with a May 1997 reduction in the capital gains tax rate, as they should if relative taxation of dividends and capital gains affects ex‐day pricing.

On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing

Published: 03/20/2007   |   DOI: 10.1111/j.1540-6261.2007.01226.x

JACOB BOUDOUKH, RONI MICHAELY, MATTHEW RICHARDSON, MICHAEL R. ROBERTS

We investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find statistically and economically significant predictability in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus issuances) yields are used instead of the dividend yield. Similarly, we find that payout (net payout) yields contains information about the cross section of expected stock returns exceeding that of dividend yields, and that the high minus low payout yield portfolio is a priced factor.