THE INTRADAY SPEED OF STOCK-PRICE ADJUSTMENT TO MAJOR DIVIDEND CHANGES - BID-ASK BOUNCE AND ORDER FLOW IMBALANCES

This paper examines the intraday stock price reaction to substantial s hifts in dividend policy, The results indicate the price reaction to b e slower than that previously found by Patell and Wolfson (1984) and c loser to that found with earnings announcements by Woodruff and Sencha ck (1988). Possible order flow imbalances are examined by looking at t he proximity of transaction prices to contemporaneous bid and ask quot es. While order flow imbalances are evident for bad news announcements , this is not the case for the dividend increase sample. This is inter preted as evidence that the price reaction to major dividend increases are in general anticipated. Fifteen minute holding period returns are computed to measure the movement of equilibrium prices during the ann ouncement period. Results show a rapid adjustment of prices to positiv e announcements with adjustment to negative announcements taking up to 75 minutes. Finally, fifteen minute lagged bid-ask returns are calcul ated to determine whether an investor could respond to the announcemen t and earn positive returns. These results are found to be dependent o n the transaction cost assumptions being made.