Statistics and Finance

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Figure 3a and 3b show the plotted average residuals for “increase” and ”decrease” dividend scenario respectively; 3c and 3d show the cumulative residuals for 3a and 3b separately.

The left part of 0 point in Figure 3a shows the changes in dividend levels implied by the residual plots prior to the announcement of a split. It has been increasing since two and half years before and rises significantly during the months close to the announcement, meaning that the residuals for these grow-faster-than-market securities are increasing more rapidly when it is close to the split announcement. However, once the announcement has been made, passing month 0 toward positive months, residuals decrease immediately toward zero. This means that dividend increments are not as significant as these before the split. Consequently, the cumulative effects for the sum of residuals are like in Figure 3c, that there is a sharp upward before the declaration (month 0), but not much increase afterwards. The author also explains the reason for positive residuals after the announcement of split, and that is because for these “increase” dividend securities, it originally has a faster-than-market rate of dividend growth, so after split the growth just has went back to its normal position relative to the market, based on which we define “increase” and “decrease”.

In “decrease” dividend scenario, the logic is similar. Figure 3b shows the monthly plotted average residuals for securities whose dividend growth is slower than the market; Figure 3d is the cumulative effects. The sharp raise also happens in the most recent months before the split and disappears right after. Since the normal relationship for this category with market is slow in dividend growth, once going back to normal it will encounter negative residuals based on its definition. That is also the reason that the cumulative curve in Figure 3d drift downward a bit after split.

Stock price and dividend growth are anticipated moving consistently with the residuals, saying that both will increase before the split announcement for the different two scenarios, but will go back to normal level relative to the market right after the announcement.

- What is the “new information” referred to in the title of the article?

In this study, “new information” precisely refers to the leaking message of a stock splitting behavior, which raises the anticipation and confidence of expected economic growth of the firm for investors. Noticeably, we think the “new information” that increases the expectation is when investors start to believe the firm has an increasing ability to pay higher dividends, but not the split announcement. On the contrary, once the split behavior is confirmed, the “new information” effect has diminished immediately.

Broadly speaking, we have generalized what is “new information”, and that is