THE EFFECT OF DIVIDEND CHANGES ON STOCK AND BOND PRICES

This study examines stock and bond price reactions to dividend changes . The positive stock market response to dividend increases has several potential explanations, two of the more commonly discussed being info rmation content and wealth redistribution between stockholders and bon dholders. The evidence presented supports the wealth redistribution hy pothesis but does not rule out the information content hypothesis. Typ ically we find that the bond price reaction to announcements of large dividend changes is opposite to the stock price reaction. Our results differ from those of Handjinicolaou and Kalay.