Complexity of Information and Trading Behavior: The Case of Dividend Increase Announcements

Posted: 22 Oct 2014

See all articles by Sanjay Deshmukh

Sanjay Deshmukh

DePaul University - Department of Finance

Ali M. Fatemi

DePaul University - Department of Finance

Iraj Fooladi

Dalhousie University - School of Business Administration

Abstract

We examine the intraday trading response of participants in the common stock market and in the preferred stock market to announcements of dividend increases on common stock. We find that participants in the preferred stock market respond more slowly to the announcement than those in the common stock market. Our results are consistent with the implications of Heiner’s model of behavior under uncertainty, which suggest that investors who face a more complicated environment respond more slowly to new information. Participants in the preferred stock market face a more complicated environment because they have to determine the source of financing of the dividend increase, which can either increase or decrease the value of these securities. In contrast, regardless of how it is financed, a dividend increase has an unambiguous positive effect on the value of common shares. Therefore, the participants in the common stock market do not need to make the additional determination that preferred shareholders do, and, thus, need less time to analyze the information.

Suggested Citation

Deshmukh, Sanjay and Fatemi, Ali M. and Fooladi, Iraj, Complexity of Information and Trading Behavior: The Case of Dividend Increase Announcements. Journal of Economic Psychology, Vol. 29, No. 1, 2008, Available at SSRN: https://ssrn.com/abstract=2512807

Sanjay Deshmukh (Contact Author)

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-8472 (Phone)
312-362-6566 (Fax)

Ali M. Fatemi

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

Iraj Fooladi

Dalhousie University - School of Business Administration ( email )

Halifax, Nova Scotia B3H 4R2
Canada
902-494-1843 (Phone)
902-494-1107 (Fax)

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