The Dividend Month Premium

Samuel M. Hartzmark
David H. Solomon*

Abstract: We document an asset-pricing anomaly whereby companies have positive abnormal

returns in months when a dividend is predicted. Abnormal returns in predicted dividend months
are high relative to other companies, and relative to dividend-paying companies in months
without a predicted dividend, making risk-based explanations unlikely. The anomaly is as large
as the value premium, but less volatile. The premium is consistent with price pressure from
dividend-seeking investors. Measures of liquidity and demand for dividends are associated with
larger price increases in the period before the ex-day (when there is no news about the dividend),
and larger reversals afterwards.
JEL Classification Codes: G12, G14
Keywords: Mispricing, Dividends, Behavioral Finance, Price Pressure

*Both authors are from the University of Southern California, Marshall School of Business, 3670 Trousdale
Parkway, Bridge Hall Suite 308, Los Angeles, CA, 90089. Email at [email protected] and
[email protected], respectively. We would like to thank Daniel Carvalho, Harry DeAngelo, Wayne
Ferson, Uri Loewenstein, David Offenberg, Pavel Savor, Zheng Sun, Chendi Zhang and seminar participants at the
University of Southern California, the California Corporate Finance Conference, the European Finance Association
2012 Meetings, and the Queens Behavioral Finance Conference for helpful comments and suggestions. All
remaining errors are our own.

Most theoretical models used in finance assume perfect liquidity, meaning that investors
can purchase or sell arbitrary amounts of a firms securities without affecting the price. However,
there is empirical evidence that demand curves for stocks slope downwards. A number of papers
show price changes around the inclusion of stocks in an index, a one-off event that results in a
largely permanent increase in demand but does not obviously contain information (Shleifer,
1986; Wurgler and Zhuravskaya, 2002; Greenwood, 2005, and others). But should price changes
be expected for predictable and temporary shifts in demand? In such cases, arbitrageurs ought to
have the best chance of reducing price impact by taking the opposite side of these trades. If
predictable price patterns result from demand shifts in large, liquid companies around regularly
scheduled, highly salient events, this presents a challenge for notions of market efficiency.
In this paper we study the reaction of stock prices when companies are expected to issue
dividends. The lead-up to dividend payment is a period when the demand and supply of shares
may shift. Investors who wish to receive the dividend, for whatever reason, must purchase the
stock before the ex-day, while conversely, those who do not wish to receive the dividend must
sell before the ex-day. At the same time, liquidity suppliers and arbitrageurs may be expected to
enter the market to offset any price impact that dividend-motivated trading is having. If
dividend-seeking investors are more numerous than dividend-avoiding investors, and if
arbitrageurs are unable or unwilling to supply sufficient liquidity to the market (both empirical
questions), then excess demand for the shares will increase the price.
Consistent with the above intuition, we find evidence of mispricing of stocks whereby
companies have significantly higher returns in months when they are expected to issue a
dividend. We term this the dividend month premium. Rather than condition on the actual
payment of dividends, we forecast a predicted dividend if the company paid a quarterly

dividend 3, 6, 9 or 12 months ago, a semi-annual dividend 6 or 12 months ago, or an annual

dividend 12 months ago. A portfolio that buys all stocks expected to issue a dividend this month
earns abnormal returns of 41 basis points. Other specifications produce even higher returns a
portfolio of companies that had a semi-annual dividend six months ago has a four-factor alpha of
115 basis points per month.
The returns in predicted dividend months are unusually high on two dimensions - first,
relative to all other companies, and second, relative to the same set of dividend-paying stocks in
months when they are not expected to have a dividend. A portfolio that is long expected dividend
payers and short all other companies (between companies) earns abnormal returns of 53 basis
points relative to a 4 factor model. Meanwhile, a portfolio that is long companies in the month of
their predicted dividend and short same companies in other months (within companies) earns
abnormal returns of 37 basis points.
These findings make the dividend month premium unlikely to be driven by risk. In
particular, the within companies portfolio exploits only the time-series variation in dividendpaying companies, resulting in a portfolio with virtually zero loadings on any conventional risk
factors. The reason is that the portfolio is long each company with quarterly dividends for 4
months of the year and short the same companies (at half the weight) for 8 months of the year.
Hence, any fixed loadings on risk factors will tend to cancel out, making systematic risk a less
likely explanation. Any explanation relating to risk would need to rely on time-varying risk
loadings, with companies being systematically riskier in months of expected dividend payment.
We hypothesize that the dividend month premium is due to price pressure from dividendseeking investors in the lead-up to dividend payment. Existing theories of dividends can provide
some basis for this view. Theories of catering, such as in Baker and Wurgler (2004) and Li and

Lie (2006), propose that investors may have an underlying demand for dividends themselves,
such as for psychological or institutional reasons. A desire for dividends and a positive discount
rate may cause investors to prefer to purchase dividend-paying stocks immediately before the
dividend is paid rather than immediately afterwards (and prefer to sell the stock after the
dividend payment, rather than before). Price pressure around dividend payment may also arise
under dividend clientele theories, whereby groups of investors desire dividend payments for
reasons such as different tax treatment, a need for income streams etc. 1 There is likely to be trade
between investors with different tax rates in the lead-up to the ex-dividend day ( Michaely and
Vila, 1996; Michaely, Vila and Wang, 1996), and such trades may impact prices.
To determine whether price pressure explains our results, we examine daily
characteristic-adjusted returns within the dividend month. We find that abnormal returns are
present for virtually the entire period between the announcement date and the ex-dividend date.
We find that there are abnormal returns on the actual declaration day (12 basis points), the
predicted declaration day (3 basis points) and on the ex-day (26 basis points). Most importantly,
there are also abnormal returns of 17 basis points in the period between the declaration and exdividend days. While previous research has highlighted the importance of returns on the ex-day,
we find that these are less than half of the total abnormal returns during the dividend period.
The abnormal returns in the interim period between the announcement and ex-day are
consistent with price pressure due to demand for dividends, but are difficult to reconcile with
alternative explanations. During this time there is no news being released about the dividend, nor
is there uncertainty about the dividend size. In addition, an investor who sells the share before
the ex-day does not receive the dividend. Thus, holding dividend-paying shares only for the

Dividend clienteles have been examined by Black and Scholes (1974), Elton and Gruber (1970), Allen, Bernardo
and Welch (2000), Graham and Kumar (2006), Becker, Ivkovi and Weisbenner (2011), and many others.

interim period results in the same tax consequences as holding any other non-dividend-paying
stock for the same length of time, and these returns are not limited to investors of a particular tax
treatment. As such, it is surprising from an asset pricing perspective that there should be
abnormal returns.
If the price increases before payment are a result of price pressure, then there ought to be
an increase in selling after dividend payment that results in negative returns. Consistent with this,
abnormal returns in the 40 days after the ex-dividend day are -72 basis points. This effect is large
enough to offset the gains during the dividend month, reinforcing the conclusion that the main
effect is a time-series one and that the price increases are reversed by subsequent price decreases.
We also show that the high returns before the ex-day and the subsequent reversals are
larger among less liquid securities, for which changes in demand for shares ought to have a
bigger effect. Less liquid securities, measured using the Amihud (2002) variable, have more
positive interim returns, more positive ex-day returns, and more negative returns (i.e. larger
reversals) in the 40 days after the ex-day. Interim and ex-day returns are also significantly lower
when there is a greater length of time between the announcement and the ex-dividend day, and
returns after the ex-day are higher (i.e. smaller reversals). This is consistent with traders having
more price impact when they are forced to buy shares over a shorter period of time. Third,
returns are larger for companies with higher dividend yields, consistent with dividend-seeking
investors having more demand for shares that pay larger dividends. The fact that these variables
predict larger price increases before the ex-day and larger reversals afterwards is strong evidence
of price pressure.
While it is difficult to determine whether the underlying source of demand for the
dividends themselves is primarily due to tax-related clientele effects or from catering effects,

there is some evidence that tentatively supports the latter interpretation. In particular, we find
that the dividend month premium is 15 basis points higher during recessions, and is also higher
during periods of high market volatility (as measured by the VIX index). If the catering demand
for dividends arises from psychology, as Baker and Wurgler (2004) suggest, it may be due to a
perception that dividends represent a safe, guaranteed source of revenue. If so, such demand for
dividends may increase with economic uncertainty, as risk aversion is higher and the availability
of alternative safe assets is reduced. However, it is also possible that trading from tax-related
clienteles may have a larger effect in recessions and volatile markets if aggregate liquidity is
reduced, so this evidence is not conclusive.
We also present evidence that the dividend month premium is driven by dividends
specifically, rather than other events that coincide with dividend payment. The dividend month
premium does not appear to be driven by the earnings announcement premium, as in Beaver
(1968), Frazzini and Lamont (2006), and Savor and Wilson (2011). The effect is not restricted to
certain calendar months of the year, nor is it driven by the seasonality of returns described in
Heston and Sadka (2008). We show that the dividend month premium is not driven by news
about the size of the dividend. By contrast, when companies omit dividend payments the effect is
not present, as expected if this is driven by the dividend itself and not by other events during the
month.
While we are certainly not the first to examine the effects of dividends on asset prices, we
contribute to the literature in part by exploring the impact of predictable dividend payment using
modern, calendar-time asset-pricing methods. The results are striking. Notwithstanding its lack
of loading on risk factors, the within-companies portfolio has abnormal returns as large as the
value premium, but with considerably less volatility. The within-companies portfolio has an

annual Sharpe Ratio of 0.195, higher than the SMB, HML and UMD portfolios, with the longonly dividend month portfolio having a Sharpe Ratio of 0.421. In addition, the strategy produces
positive excess returns in 73 out of 83 years, with the largest negative annual return being only
-4.6%. The effects are not limited to small or illiquid stocks: dividend-paying companies tend to
be larger and more visible, and the patterns in returns hold on a value-weighted as well as an
equal-weighted basis2. Most of the abnormal returns are from the long side of the difference
portfolio, rather than the short side (for which costs of implementing the strategy are higher).
Due to dividend payments being highly persistent, significant alphas can be obtained using
dividend information lagged up to 20 years. Our findings contribute to the literature on asset
pricing anomalies that finds abnormal returns around regular, predictable events.3
Our paper also contributes to the literature on the pricing of dividends. We document a
result not apparent from earlier papers that examined short periods during the dividend month
namely, that there are abnormal returns present during the entire dividend period, that there are
large reversals in the weeks afterwards, and that both patterns appear to share a common
underlying cause of investor price pressure. We also describe how dividend returns (and
reversals) are significantly higher during recessions and volatile markets, both somewhat
surprising facts from the perspective of standard theories of dividend payment. Our findings raise
important questions as to what underlying model of investor demand for dividends is causing
prices to predictably increase well in advance of the ex-day, and reverse in the period afterwards.
Part of the challenge for such models is to explain why dividend-seeking investors do not
purchase the share a few days earlier, and capture the abnormal returns and the dividend.
2

Many anomalies tend to be concentrated in smaller stocks, including post-earnings announcement drift (Chordia et
al, 2008), momentum (Hong, Lim and Stein, 2000), and others.
3
These include the earnings announcement premium (Beaver, 1968; Frazzini and Lamont, 2006; Savor and Wilson,
2011), the January effect (Keim, 1983), return seasonality (Heston and Sadka, 2008), one month reversals
(Jegadeesh, 1990), momentum (Jegadeesh and Titman, 1993), and 3-5 year reversals (DeBondt and Thaler, 1985).

The remainder of the paper is structured as follows. Section 2 describes the hypotheses.
Section 3 discusses the data. Section 4 presents the main results of the paper, section 5 examines
alternative explanations for our findings, and section 6 concludes.
2. Literature review and hypotheses
2.1 Market efficiency
The null hypothesis is that under simple models of market efficiency (Fama (1970)),
using past information in dividend payments should not be able to generate risk-adjusted returns.
Dividend payments tend to be quite stable over time (in the sample, 88% of firms who paid a
dividend 12 months ago pay a dividend in the current month). While the news component of
dividend announcements ought to affect prices, any predictable aspect of dividend
announcements or payments should not result in abnormal risk-adjusted returns.
2.2 Price pressure
Our main alternative hypothesis is that returns are high because of predictable price
pressure in the lead-up to dividend payment. During this time, the supply and demand of
dividend-paying shares will be determined in part by investors trading based on the dividends
themselves, and in part by liquidity providers and arbitrageurs hoping to profit from short-term
price movements. If there are some investors who receive utility from dividends and discount
rates are positive, these investors will have a higher willingness to pay for companies that will
pay dividends sooner. As a consequence, these investors will be more willing to buy the stock, or
less willing to sell the stock, immediately before the dividend is paid rather than immediately
afterwards. This does not require that the same set of investors are purchasing the stock
immediately before the ex-day and selling immediately afterwards, however. Investors may be

purchasing the same stocks that they were already going to buy, but accelerating the purchase to
occur before the ex-day (and similarly, delaying planned sales until after the ex-day).
If the trades of arbitrageurs and liquidity suppliers are insufficient to offset the trades
from dividend-seeking investors, then we expect excess demand for dividend-paying shares,
inasmuch as the quantity demanded will exceed the quantity supplied at the old price, and the
increase in price will restore equilibrium. In this case, the underlying demand for dividends
themselves (which we alternatively refer to as a desire or a willingness to pay for dividends)
translates into changes in the supply and demand over time of dividend-paying assets.
The existence of price pressure from dividend-seeking investors would suggest that there
will be price increases in the lead-up to dividend payment, and price decreases afterwards. In
addition, the announcement of dividends will resolve investor uncertainty about whether the
dividend will be paid, and thus excess demand may increase around the announcement as well.
Price pressure as a general concept does not explain why there is an underlying demand
for dividends. As noted earlier, a number of theoretical models are consistent (at least in spirit)
with the intuition above. These include catering theories that firms respond to investor demand
for dividends due to psychological or institutional reasons as in Baker and Wurgler (2004), or
from the trading of dividend clienteles with different tax rates such as in Michaely, Vila and
Wang (1996).
Price pressure, regardless of how it arises, leads to specific predictions about returns.
First, returns should be related to liquidity, as less liquid securities are likely to experience
greater price movements from a given level of excess buying. Second, price pressure is likely to
increase in the lead-up to dividend payment. If investors only wish to receive the dividend, they
may not want to hold the stock for longer than necessary as it would expose them to price

fluctuations. As the length of time before receiving the dividend becomes shorter, these investors
are more likely to purchase the stock. Third, price pressure is likely to lead to reversals after the
dividend is paid, either due to tax arbitrage traders unwinding their positions or catering
investors having a lower preference for the stock. Such reversals should be related to the level of
price increases that occurred before, and thus be driven by the same types of variables.
2.3 Alternative hypotheses
There are a number of papers that examine the relation between dividends and stock
returns, and may predict alternative reasons for high returns in months of dividend issuance.
2.3.1 The ex-day effect
One of the most studied aspects of dividends and stock returns is the returns on exdividend days. As early as Campbell and Beranek (1955), it has been found that the ex-dividend
day stock price change is typically less than the full amount of the dividend. This has been
argued by Elton and Gruber (1970) to be driven by dividend clienteles and the tax-related
consequences for the marginal investor.4 Under this hypothesis, the taxability of dividends for
the marginal investor causes the price drop on ex-dividend days to be equal to the after-tax value
of the dividend to the marginal investor (which will be less than the face value).
Subject to the possibility of price pressure before the ex-day (as discussed above),
theories of the ex-day tend to predict that price increases should be limited to the ex-day itself.
As a result, we test whether dividend month price effects are limited to the ex-day itself.

See Elton, Gruber and Blake (2005), Green and Rydqvist (1999), McDonald (2001), Graham, Michaely and
Roberts (2003), Bell and Jenkinson (2002), and numerous others. Other proposed explanations for the ex-dividend
day effect include microstructure arguments (Dubofsky, 1992; Bali and Hite, 1998; Frank and Jagannathan, 1998,
and others), and dynamic clientele models related to taxation (e.g. Rantapuska, 2007; Koski and Scruggs, 1998;
Graham and Kumar, 2006; Felixson and Liljeblom, 2008). For a discussion of the literature exploring why firms pay
dividends, see Allen and Michaely (2003)).

10

2.3.2 Announcement returns, risk and pessimism

A smaller literature has examined the returns on dividend announcement days, most
notably Kalay and Loewenstein (1985) and Eades, Hess and Kim (1985). Both papers find that
dividend announcements have positive returns, and Eades, Hess and Kim (1985) find that
aggregate returns are positive even if dividend omissions are included. Kalay and Loewenstein
(1985) argue that the high returns could be explained by risk, as stock returns are also more
volatile on announcement days. Dividend announcements could also be periods when the firms
returns are correlated with macroeconomic risks, as Savor and Wilson (2011) argue holds for the
earnings announcement premium. A risk explanation predicts that dividend months should
exhibit either loadings on standard factors (for systematic risk), or higher volatility (for both
systematic and idiosyncratic risk).
Eades, Hess and Kim (1985) argue that investors may be overly pessimistic about the
likelihood of the firm being able to continue dividend payment. In such a case, then they should
on average experience a positive surprise around the period when announcements are expected.
One way to distinguish this explanation is that if investors are overly pessimistic, the returns
effect should be limited to the announcement itself, as this is when the news is released.
2.3.3 Interim returns, post-period returns and the Brennan (1970) model
Returns during the interim period between the announcement and the ex-day have
received less systematic study. Empirically, Lakonishok and Vermaelen (1986) find that the five
days before the ex-day have abnormal positive returns. Eades, Hess and Kim (1985) examine the
period around the announcement day, and find that after controlling for ex-day effects there are
not abnormal returns after dividend announcements. In terms of the post-period returns,
Lakonishok and Vermaelen (1986) find that the five days after the ex-day have negative returns.
11

Theoretically, there are fewer models that make clear predictions of high returns in the
interim period. One possible explanation is the Brennan (1970) model of taxes and dividends,
which predicts that pre-tax risk-adjusted returns should be higher for companies with a higher
dividend yield. As Kalay and Michaely (2000) discuss, this is a cross-sectional prediction,
meaning that dividend-paying companies should have high returns on average, including during
the interim period.5 A key distinction between the Brennan (1970) model and price pressure is
that price pressure predicts positive returns before the ex-day, but negative returns afterwards,
whereas Brennan (1970) predicts high returns in general.
3. Data and summary statistics
The data on daily and monthly stock returns and dividends come from the Center for
Research in Security Prices. Monthly returns run from January 1927 until December 2011.
Dividend declaration dates and ex-dividend dates are taken from the CRSP daily file. We
consider shares listed on the New York Stock Exchange (NYSE), American Stock Exchange
(AMEX) and NASDAQ exchange. We consider only common shares of US companies (CRSP
share code 10 or 11), and thereby exclude ADRs, various ownership units (e.g., limited
partnership interests), closed-end funds, REITs, and shares of companies incorporated outside
the United States. We also exclude shares with prices less than $5 in the previous month and
firms missing a price in the previous month, with these restrictions applying to the previous day
for the daily return analysis.

The relation between dividend yield and expected returns has been studied in a number of papers: Litzenberger and
Ramaswamy (1979, 1980, 1982) find a relation between dividend yield and expected return, while Black and
Scholes (1974) and Miller and Scholes (1982) do not. Kalay and Michaely (2000) reconcile these results by showing
that the relation between dividend yield and returns holds only when returns are measured in shorter periods (up to a
month) around the ex-dividend date, and thus is better understood as a time-series effect, which is less consistent
with Brennan (1970).

12

For dividend payments, we consider ordinary cash dividends paid in US dollars (CRSP
distribution codes starting with 12). Because we are interested in predicting future dividends,
we focus on dividends that are recurring in nature, namely quarterly, semi-annual, and annual
dividends (third digits of 3, 4 and 5). We also include unknown and missing frequency dividends
(third digits 0 and 1) as being equivalent to a quarterly dividend. We exclude year-end or final,
special, interim and non-recurring dividends, although the main results are robust to their
inclusion, as well as being robust to excluding unknown and missing dividends. Overall, 65.4% of
firm/month observations paid some cash dividend in the prior 12 months. 89.25% of all dividend
observations are quarterly, 1.50% of dividends are semi-annual, 0.48% are annual, and 8.09%
are of unknown or missing frequency. Because we are generally examining dividend vs. nondividend months for companies, we exclude companies that paid a monthly dividend in the
previous 12 months unless otherwise noted (0.7% of dividend observations). Results are robust
to the inclusion of monthly dividend observations. The results are also very similar if only
quarterly dividends are included. Dividend months refer to months with an ex-date unless
otherwise noted. Table I presents summary statistics for companies that paid a dividend in the
past 12 months and those that did not.
4. Results
4.1 Predicted dividend months and raw returns
In this section we explore the question of whether dividend-paying stocks have different
returns in months of expected dividend payment. The concept of expected dividend payment is
an important one, as actual dividend payment involves both a news component and a predictable
component. Companies are known to be reluctant to omit dividends, as shown by John and
Williams (1985), Bernheim (1991), and Nissim and Ziv (2001). As a result, conditioning on the
13

existence of a dividend announcement will exclude the negative returns of dividend omissions,
resulting in a sample with high returns, as in Kalay and Loewenstein (1985). However, because
announcements are not known with certainty ahead of time, this portfolio is not tradable. Instead,
the relevant asset-pricing question is whether there are high returns in the periods when an
announcement is expected. This will address the fact that returns are lower if the announcement
is delayed or the dividend is omitted, as noted in Kalay and Loewenstein (1986) and Eades, Hess
and Kim (1985).
Precisely because companies are reluctant to omit dividends, the existence of a dividend
payment is quite predictable using the timing of past payments. We forecast using the following
rule: a company has a predicted dividend in month t if it paid a quarterly dividend in months
t-3, t-6, t-9, or t-12, a semi-annual dividend in months t-6 or t-12, an annual dividend in months
t-12, or a dividend of unknown frequency in months t-3, t-6, t-9, or t-12 (excluding the unknown
dividends does not affect the results). In Table II, we explore how returns vary based on the
timing of past dividends. In Panel A, we consider dividends of all frequencies (monthly,
quarterly, semi-annual, annual, unknown and missing). We group stocks according to when the
dividend was paid: 1 month ago, 2 months ago etc. up to 12 months ago.
It is important to note that while the conditioning is on the month that contains the exday, this does not mean that it is only the ex-day that is of interest. The median time between the
announcement and the ex-day is ten days, and hence the month that includes the ex-day will exmonth will in many cases include at least a large part of the interim period, and often the
announcement as well. The advantage of using a monthly returns measure is that it makes it easy
to correct for known determinants of expected returns (size, book-to-market momentum) using

14

factor regressions, and the estimates of alpha thus obtained have a clear interpretation in terms of
asset-pricing theory and allow for comparison with other anomalies.
Table II Panel A presents average returns, standard deviation of returns and the
probability of dividend payments in the current month according to past dividend timing. It
shows the patterns in abnormal returns common throughout the paper, namely that the returns are
higher in months when dividends are expected to be paid. The four months with the highest
average returns are those when a dividend is expected to be paid (12, 6, 3 and 9 months ago, with
returns of 1.43%, 1.43%, 1.41% and 1.40% respectively). Average returns are lowest one month
after a dividend is expected to be paid (10, 4, 7 months and 1 month ago, with returns of 1.03%,
1.03%, 1.04%, and 1.06% respectively). Expected dividend months also have the lowest standard
deviation of returns. The four lowest standard deviations months are for dividends 3, 9, 6 and 12
months ago (9.61%, 9.64%, 9.65%, and 9.65% respectively). The four most volatile months, by
contrast, are immediately before an expected dividend (2, 5, 8 and 11 months ago).
The result that the high return dividend months also have lower volatility suggests that
the explanation in Kalay and Loewenstein (1985), whereby high announcement day returns also
have higher risk, does not seem to hold for the dividend month as a whole. Panel A also shows
the persistence of dividend payments. Companies that paid dividends 3, 6 and 9 and 12 months
ago have probabilities of paying dividends in the current month equal to 85%, 85%, 84% and
88% respectively (slightly higher if only quarterly dividends are considered).
Panel B shows the distribution of monthly returns for portfolios formed using our formal
definition of predicted dividends. Months with a predicted dividend have average returns of
1.38%, and a standard deviation of 5.76%. Companies with a dividend in the last 12 months that
do not have a predicted dividend this month have average returns of 1.02% and a standard

15

deviation of 5.75%. Companies who did not pay a dividend in the past 12 months have an
average return of 1.01%, and a standard deviation of 8.52%. Hence, the portfolio of companies
predicted to pay dividends has higher expected returns and the same standard deviation of returns
as the portfolio of past payers not predicted to pay dividends this month. Consequently, predicted
dividend payers have the highest Sharpe ratio of the three categories. This suggests that predicted
dividend payers are not more risky, a question to which we turn next.
4.2 Abnormal returns in dividend months
While predicted dividend payers have higher expected returns, the central asset pricing
question is whether these higher returns represent compensation for some source of risk that is
important to investors. It may be that companies that pay dividends are more exposed to
systematic risk, and the high returns reflect this different risk loading. We consider this question
in several regards. The first is the level of abnormal returns to predicted dividend payers under
standard models of expected returns. The second is to compare predicted dividend payers with
other companies: all other companies not predicted to pay a dividend this month (between
companies), and those companies that paid dividends in the past year but which are not
predicted to pay a dividend in the current month (within companies).
Systematic risk may be a likely explanation of differences in returns between companies.
The short side of the between-companies portfolio will include companies that never pay
dividends, as well as dividend-paying companies in non-dividend months. Dividend-paying and
non-paying companies differ in many economic respects: as Table I indicates, dividend-paying
stocks have larger market capitalization, and a higher book-to-market ratio. Dividend payment
may be correlated with economy-wide risks that investors care about, and such risk exposure
may drive differences in returns between dividend-paying and non-dividend-paying stocks.
16

Systematic risk seems less likely to explain the patterns in returns within companies. By
comparing the same set of companies over time, any risk loadings that are constant over time
will tend to cancel out. For risk to explain the within companies returns, the systematic risk of
the stock must be higher in months of expected dividend payments. Savor and Wilson (2011)
argue that earnings announcements can cause a firm to be more exposed to macroeconomic risks,
resulting in higher returns. For the rest of the month outside the announcement, it is less clear
why the firm should have a different exposure to risk. The most plausible change in exposure
would be for liquidity, which we examine below (and which loads in the wrong direction to
explain the effect).
Table III examines the returns of predicted dividend-paying stocks relative to standard
factors the market, size, book-to-market, momentum and liquidity. We form portfolios of
stocks based on predicted dividend payment, and regress them on returns of portfolios for excess
market returns, SMB, HML, UMD (all from Ken Frenchs website), and in some specifications
the Pastor and Stambaugh (2003) liquidity factor:
RPredDiv,t Rf = + Mkt-Rf*RMkt-Rf,t + SMB*RSMB,t + HML*RHML,t + UMD*RUMD,t + t

(1)

Table III Panel A shows the abnormal returns relative to a four factor model ( in the
above regression) for predicted dividend payers versus other stocks. In each case, the long
portfolio is the average return of all predicted dividend payers, equal-weighted or value-weighted
according to the specification. We consider several different short portfolios all companies that
are not expected to pay a dividend this month, companies that paid a dividend in the past year
but are not expected to pay this month, and companies one month after they are expected to pay
a dividend. The first short portfolio corresponds to the between companies question, while the
latter two are within companies tests.

17

Panel A shows that predicted dividend payers have significantly positive abnormal
returns. An equal-weighted portfolio of predicted dividend-payers has abnormal returns of 41
basis points per month (with a t-statistic of 8.68), while a value-weighted portfolio of predicted
dividend-payers has abnormal returns of 23 basis points per month (with a t-statistic of 6.82).
Predicted dividend payers also have high returns relative to the comparison portfolios. A
portfolio that is long predicted dividend payers and short all other companies (between
companies) earns abnormal returns of 53 basis points per month on an equal-weighted basis (tstatistic of 12.43) and 31 basis points on a value-weighted basis (t-statistic of 6.64). The portfolio
of all companies other than predicted dividend payers has significantly negative returns: -12
basis points for equal weighted portfolios (t-statistic of -3.37) and -8 basis points for valueweighted portfolios (t-statistic of -4.41).
Perhaps more importantly, predicted dividend payers have abnormal returns relative to
past dividend payers in other months (within companies). This can be seen in the portfolio that
is long predicted dividend payers and short all other companies with a dividend in the last 12
months. The within companies difference portfolio earns abnormal returns of 37 basis points on
an equal-weighted basis (t-statistic of 15.48) and 28 basis points on a value-weighted basis (tstatistic of 6.64). The effect is larger when shorting companies only in the month immediately
after a predicted dividend. In addition, the portfolio that is short companies one month after a
predicted dividend earns abnormal returns of -18 basis points per month when value-weighted (tstatistic of -4.43), although the effect is smaller on an equal-weighted basis. This is consistent
with dividend-seeking investors creating selling pressure after the dividend has been paid.
Table III Panel B shows that the effects are similar under different models of expected
returns. For the between companies difference portfolio, monthly abnormal returns are 51 basis

18

points under a CAPM, 52 basis points under the Fama and French (1993) 3 factor model, 53
basis points when the momentum factor is added and 51 basis points when the Pastor and
Stambaugh (2003) liquidity factor is added (all highly significant). The abnormal returns for the
within companies portfolio are similar for the CAPM, 3 factor and 4 factor models, and adding
the liquidity factor makes the effect larger, to 43 basis points per month.
Panel B also shows the loadings on excess market returns, SMB, HML, UMD and LIQ
(all taken from the 4 factor plus liquidity regression). The within companies portfolio has
insignificant loadings on excess market returns, SMB, HML and UMD. This is consistent with
the earlier argument that this difference portfolio has little exposure to risk factors that are
constant over time because it operates within a set of companies. The only somewhat significant
loading is on the liquidity factor (-0.015, t-statistic of -2.19). However the loading on liquidity is
negative companies have less liquidity risk in months of predicted dividend payment, not more.
This explains why the alpha gets larger when adding liquidity to the four factor model.
Overall, Table III provides strong evidence of abnormal returns for predicted dividend
payers. These returns are not driven by standard factors, and are unlikely to be driven by other
factor loadings that remain constant through time. To demonstrate the relative size of the
anomaly, Fig. 1 plots the cumulative value of the within-companies portfolio starting with an
initial investment of $1 on December 31, 1927. For comparison, the cumulative value the SMB
and HML portfolios are also shown. The final value in December 2011 is $35.11 for the dividend
month premium, versus $7.47 for SMB and $26.84 for HML. The dividend month premium is
also less volatile than either SMB or HML.
4.3 Daily returns within dividend months

19

To examine the extent to which price pressure is contributing towards the dividend month
premium, we examine daily returns within dividend months. The hypothesis that returns are
driven by price pressure arising from an increase in the excess demand for stocks has the
following testable predictions:
1. If returns (announcement, interim, ex-day) are driven by price pressure, they should
lead to reversals after dividend payment.
2. If returns are driven by price pressure, then they should be greater in cases when
investor trades are likely to have a bigger price impact, such as when there is less
liquidity and when the demand for dividends is higher. Such cases should also
experience larger subsequent reversals.
In terms of alternative hypotheses, we consider the following:
3. If the effect is driven by investors being positively surprised by dividend news or
announcement risk, then returns should be concentrated around the announcement
(when the actual news is revealed, and investors are positively surprised).
4. If the effect is driven by the direct tax effects from dividend payment (as in Elton and
Gruber (1970), the effect should be concentrated on the ex-dividend day itself, when
the tax treatment changes.
5. If the effect is driven by Brennan (1970) model, higher dividend yields should be
associated with higher returns in all periods.
While our results do not rule out the existence of the alternative explanations above, we
are interested in examining the extent to which they explain the entirety of the returns available
in the dividend period. To evaluate this, we calculate the characteristic-adjusted returns for
dividend-paying companies in different periods around dividend payment. Similar to Daniel,

20

Grinblatt, Titman and Wermers (1997), we sort stocks into quintiles based on their market
capitalization, book value of equity divided by market value of equity (as in Fama and French
(1992)) and returns from t-20 days to t-250 days (thus computing a daily analog of months t-2 to
t-12), and match the stock to the portfolio with the same quintiles of each variable.
Characteristic-adjusted returns are then the returns of the stock minus the returns on the portfolio
matched on quintiles of size, book-to-market ratio and momentum. If returns are calculated using
daily calendar-time portfolios and abnormal returns using daily four-factor alphas, the results are very
similar.

Ex-dividend days are taken from the CRSP daily file, as are dividend declaration days. A
tradable strategy using the declaration date must use the predicted declaration days, since the
actual declaration day will not be known in advance. Predicted dividend days are taken to be 63
trading days after the last dividend declaration day. 6 We calculate returns for the actual
declaration day, the predicted declaration day, the interim period (one day after declaration until
one day before the ex-day), the ex-day, and the 40 days after the ex-day. For the daily returns, we
limit the sample to quarterly dividends.
We examine the patterns in daily returns in Table IV. Panel A presents the mean
characteristic-adjusted returns for each of the periods described above. The actual declaration
day has average adjusted returns of 11.6 basis points, the predicted declaration day has adjusted
returns of 3.1 basis points, the interim period has adjusted returns of 15.8 basis points, the ex-day
has adjusted returns of 26.2 basis points, and the 40 day period after the ex-day has adjusted
returns of -71.9 basis points (all highly statistically significant). Out of the total effect of 53.6

This is roughly the average number of trading days per year divided by 4. The results are very similar if dividends
are predicted based on 3 months from the average date of the last 4 dividends, or by adding in the average gap
between the last 4 dividends. More complicated rules based on day-of-the-week estimates, as in Kalay and
Loewenstein (1986) and Graham, Koski and Loewenstein (2006), will lead to greater accuracy.

21

basis points from announcement to ex-day, roughly 21% is due to the declaration day, roughly
31% is due to the interim period, and roughly 48% is due to the ex-day. For taxable investors, the
after-tax return on the ex-dividend day will be less, but tax-free investors such as charitable
institutions would be able to receive the full ex-dividend return. Rantapuska (2007) examines
individual trading behavior and finds that tax advantaged traders do in fact engage in overnight
trades to take advantage of ex-day effects, earning significant returns.
To illustrate the pattern in daily returns, Fig. 2 plots the daily characteristic-adjusted
returns around the ex-dividend date, from 30 days beforehand until 60 days afterwards. Returns
increase as the ex-day approaches, with the largest abnormal return on ex-dividend day, and
become negative in period between dividends, increasing again as the next dividend approaches.
Fig. 3 presents returns centered around the announcement date. The largest returns are on the
announcement day and the day afterwards, decreasing over time but still significantly positive
for the 10 subsequent trading days. Importantly, the returns after the announcement are not
driven by companies with an ex-day over the subsequent days, as we exclude ex-day
observations from the sample. The results in Fig. 3 contrast with Eades, Hess and Kim (1985),
who find abnormal returns only on the announcement day. We examine a much longer time
period than their study, which may account for the different results.
If the positive returns in dividend periods are driven by price pressure, we may expect
them to be associated with increases in trading volume. We examine the daily abnormal trading
volume around the ex-day and the announcement day, with abnormal volume computed as:
AbnormalVolumet = (Volumet 250DayAvgVolumet)/ 250DayAvgVolumet
Where Volume is the daily trading volume (adjusted for stock splits, etc.) and
250DayAvgVolume is the average daily volume over the previous 250 trading days taken over

22

days when the share actually traded, provided there are at least 120 non-missing volume
observations). Abnormal volume is thus a time-series measure computed on a rolling basis,
comparing each days volume as a percentage change relative to the previous yearly average. We
plot the average level on each day, and compute the t-statistics for each mean (with red bars
indicating a t-statistic greater than 2).
Figures 4 and 5 present abnormal daily volume around the ex-day and announcement
day, respectively. The patterns in volume are similar to the patterns in returns in Figures 2 and 3.
Around the ex-day (Fig. 4), abnormal volume is significantly positive in the lead up to the ex-day
(peaking at almost 15% above average on the day before the ex-day), and significantly negative
afterwards. High volume periods are generally associated with high return periods, and vice
versa for negative returns after the ex-day. The only exception to this pattern is the ex-day itself,
which has very high returns in Fig. 2, but does not have significant abnormal volume. Around
the announcement day (Fig. 5), abnormal volume is significantly negative before the
announcement, and significantly positive on the announcement day and the 8 days afterwards.
The largest abnormal volume is actually the day after the announcement (at around 15% higher
than average). The strong relation between returns and volume is consistent with price impact
from investor trades. This result complements the findings in Michaely and Vila (1996) that
volume increases in the period around ex-day.
We next investigate how the dividend month returns are related to liquidity, in Table IV
Panel B. Karpoff and Walkling (1988) and Karpoff and Walkling (1990) find that ex-day returns
are related to the level of spreads and transaction costs. We extend this to examine how liquidity
and price impact affect returns during the rest of the dividend cycle, using two measures of
liquidity. First, we examine the measure of illiquidity used in Amihud (2002), defined as Illiqi,t =

23

, where VOLD is the dollar volume that day, and D is the number of days when

the stock traded (over the past 250 days). The measure is multiplied by 1000, and winsorized at
the 1% level. For each return period (announcement, interim, etc.), the measure is taken from 5
days before the announcement to 255 days before the announcement, provided there are at least
120 days with some trades. The Amihud measure captures how large a price movement is
associated with each dollar traded, with large numbers indicating less liquidity.
Second, we consider the length of the interim period between the declaration and the exdividend day. Because liquidity has a time dimension, when traders need to execute their orders
over a shorter period they are likely to have more price impact. In all cases, we predict that less
liquid companies will exhibit greater price pressure before the dividend payment, and greater
reversals afterwards. All standard errors are clustered by firm and by day.
The regression equation is (for example):
Rperiod,i,t - RBenchmark,t = + *Amihudi,t, + it,
where period is the announcement day, the interim period, the ex-day, or the 40 days afterwards,
and Benchmark is the average returns over the same period for the portfolio of firms in the same
quintiles of size, book-to-market ratio and momentum. In other regressions, the Amihud liquidity
measure is replaced with the number of days in the interim period.
The results indicate that lower levels of liquidity are associated with higher interim and
ex-day returns, and larger reversals. When examining the effect of the length of the interim
period, for interim returns the coefficient is -0.123, for ex-date returns the coefficient is -0.022,
and for the 40 day post-period the coefficient is 0.128 (all significant at a 1% level). A one
standard deviation increase in the length of the interim period is 13.9 days (which gives 1.39, as

24

the variable is divided by 10), corresponding to interim returns being lower by 17.1 basis points,
ex-day returns being lower by 3.0 basis points, the post period returns being higher (i.e. less
negative) by 17.8 basis points.
Under the Amihud (2002) illiquidity measure, less liquid securities also exhibit larger
interim and ex-day returns, and greater reversals. The coefficient on interim returns is 26.51, the
coefficient for the ex-day is 18.19, and the coefficient for the forty days after the ex-day is
-72.92, all significant at a 1% level. The standard deviation of the Amihud measure is 0.00307,
meaning that a one standard deviation increase in illiquidity is associated with higher interim
returns by 8.1 basis points, higher ex-day returns by 5.6 basis points, and lower (i.e. more
negative) returns in the subsequent forty days by 22.4 basis points. Overall, Table IV indicates
that dividend month returns are related to liquidity, consistent with their being associated with
price pressure. Liquidity affects both the size of the initial price increase, and the size of the
subsequent reversal.
4.4 Dividend month returns and proxies for the demand for dividends
Next, in Table V we examine how the returns in each period may be affected by shifts in
the demand for dividends. We seek to test whether the stock price changes are due to investor
demand for the dividends themselves, either due to tax or behavioral reasons, being translated
into increases in excess demand for dividend-paying stocks around the period of payment (as
discussed in section 2.2). Because we cannot observe the demand for dividends directly, we
examine whether stock price changes around dividend periods are different in cases when we
would expect investor demand for dividends to be larger.
We consider two variables that may be associated with higher demand for dividends. The
first is the dividend yield. We measure this as the average dividend payment from the previous
25

12 months (in months that included a dividend), divided by the share price from the previous
month. If investors desire dividends, either due to catering, or due to tax-arbitrage trades, they
will likely have a larger desire for companies that pay larger dividends. This presents a test of the
Brennan (1970) model as well under this model, dividend yield should be associated with
higher returns in all periods, whereas under price pressure it should lead to higher price increases
up to the ex-day, and higher reversals afterwards.
The second proxy for dividend demand is economic uncertainty. Under a catering model,
if dividend demand is driven by psychological reasons (as Baker and Wurgler (2004) suggest), it
may be due to a desire for the safe and secure payouts that dividends represent. Dividends tend to
be less volatile than prices (Shiller, 1981). If investors view dividends and capital gains in
separate mental accounts [such as described in Thaler (1980)] they may perceive dividends to
guarantee a certain level of returns in the future. Investors may fail to appreciate the Miller and
Modigliani (1961) argument that dividends will be offset by equivalent price decreases in the
absence of taxes and frictions. This may cause them to view dividends as being a guaranteed
source of returns, while viewing unrealized capital gains as risky.
These possibilities suggest that the demand for dividends will be higher during periods of
aggregate economic uncertainty. In such times, risk aversion is higher and the availability of
alternative safe assets is reduced, making dividends especially attractive. Economic uncertainty
may also affect the returns in dividend periods if it is associated with changes in the level of
aggregate liquidity. In such cases, a reduction in trading or an increase in the price of liquidity
may cause tax-motivated traders to have a larger price impact, as there are fewer offsetting trades
from liquidity providers.

26

As noted before, an increase in demand for dividends can lead to an increase in excess
demand for dividend-paying assets before the ex-day, even if the same individual investors are
not actively trading in and out of the asset over short time horizons. Investors may simply shift
the timing of trades they were already planning to make to receive the dividend. Another
possibility is that even if individual investors are not implementing dividend capture strategies
themselves, mutual funds may be doing so on their behalf to satisfy investor demand for assets
with higher dividend yields. Harris, Hartzmark and Solomon (2012) provide evidence consistent
with this possibility, as some funds (particularly those with high dividend yields) consistently
pay more dividends than what their quarterly holdings imply they should be earning, suggesting
that additional dividend capture strategies are occurring.
We examine the effect of economic uncertainty using two measures. First, whether the
economy is in recession, taken from the National Bureau of Economic Research definitions, and
second, the VIX index, which measures the market volatility for the next month implied by S&P
500 Index options. Out of the two measures, VIX is perhaps more likely to be associated with
liquidity changes, as it responds more directly to the levels of trade and market movements. To
the extent that the recession indicator is a slower-moving variable, it would only be associated
with lower frequency shifts in liquidity.
We consider these questions in Table V. The methodology is similar to Table IV
characteristic adjusted returns from the declaration, interim, ex-day, and post-period are
regressed on the dividend yield, on a dummy for recessions and on the VIX index. The results
indicate that higher dividend yields are associated with higher interim and ex-date returns, but
lower post-period returns (i.e. larger reversals). The coefficient on interim is 0.404, the
coefficient on ex-day is 0.070, and the coefficient on 40 day post period is -0.562 (all significant

27

at a 1% level when clustered by firm and day). A one standard deviation increase in dividend
yield is 0.58%, corresponding to an additional 23.5 basis points during the interim period, an
additional 4.1 basis points on the ex-day, and lower returns by 32.6 basis points in the postperiod.
The association between high dividend yields and lower returns in the post period is
difficult to reconcile with Brennan (1970), which predicts high returns from high dividend yields
in each period. The negative post-period returns tend to offset the higher interim and ex-day
returns, consistent with Kalay and Michaely (2000) who find no relation between dividend yield
and returns when measured over quarterly or longer horizons, and thus argue that the effects of
dividend yield tend to operate in the time series. To this extent, our findings that the dividend
month premium is a within-firm time-series effect is consistent with their results.
For recessions, we also find that interim and ex-day returns are higher, but post-period
returns are lower (i.e. reversals are larger). Interim returns are larger by 9.6 basis points during
recessions (significant at a 5% level), ex-day returns are higher by 8.1 basis points (significant at
a 1% level), and post period returns are lower by 28.2 basis points (significant at a 1% level).
This pattern is also repeated for the VIX index, whereby higher implied market volatility predicts
higher interim and ex-day returns, but lower (more negative) post-period returns. A one standard
deviation increase in VIX (0.794) increases interim returns by 18.1 basis points, increases ex-day
returns by 3.5 basis points, and decreases post-period returns by 29.4 basis points. None of
dividend yields, recessions or VIX has any significant effect on announcement day returns.
Overall, these results give support to the explanation of price pressure. The large effects
during the interim period occur when there is no news about the dividend, and when holding the
share does not subject the investor to additional tax consequences, as the dividend is not received

28

unless the stock is held until the ex-dividend day. In addition, the returns in the period after the
dividend are negative, consistent with the temporary price pressure being reversed. The fact that
both interim returns and subsequent returns are related to measures of liquidity and proxies for
the level of demand for dividends supports the view that both effects share the same underlying
cause of price pressure.
Table IV and V also suggest that Savor and Wilson (2011) announcement risk
explanation does not drive the results. Roughly 80% of the returns occur after the announcement,
when there is little rationale for risk exposure. Moreover, to the extent that dividend-month
returns are related to macroeconomic risk (as measured by recessions and VIX), the relation
holds for interim, ex-day and post-period returns, but not for the declaration day.

5. Alternative explanations
5.1 Potential alternative explanations
There are a number of other potential explanations of high returns during dividend
months. One possibility is other events that coincide with dividend months. If dividend-paying
months coincide with earnings announcement months, the dividend month premium could be
picking up the earnings announcement premium (Beaver , 1968; Frazzini and Lamont, 2006).
Another potential explanation lies in the seasonality in returns identified in Heston and Sadka
(2008), where returns in 12 months increments (12 months ago, 24 months ago etc.) predict
current month returns. The dividend month effect may be driven by news contained in the
dividend announcements. It may be driven by calendar-month effects such as being concentrated
in January, as Keim (1983) noted for the small firm effect . We investigate all of these
possibilities in the following sections.
29

5.2 Returns sorted by dividend frequency

Since most dividends in the sample are quarterly, the dividend month returns may be
driven by some other event with similar quarterly timing to dividends. To test this, we examine
dividends of different frequencies. If the effects are driven by dividends, then companies that pay
dividends on a semi-annual basis should show abnormal returns for dividends 6 months ago and
12 months ago, but not for 3 or 9 months ago. Similarly, annual dividend payers should only
show abnormal returns for dividend payments 12 months ago, but not 3, 6 or 9 months ago. We
test these predictions in Table VI, which shows the intercepts from a four-factor regression
according to the time since payment (1 to 12 months ago) and dividend frequency (all dividends,
quarterly, semi-annual, annual, monthly, and unknown).
Table VI shows that the patterns in abnormal returns match the frequency of the
dividends, providing support for the proposition that the abnormal returns are a property of
dividend-paying months specifically, rather than some other quarterly event. Companies with
quarterly dividends have abnormal returns 3, 6, 9 and 12 months after dividend payments
(between 48 and 64 basis points per month and highly significant). Companies with semi-annual
dividends have abnormal returns 6 months after dividend payment (115 basis points, t-statistic of
5.70) and 12 months after payment (84 basis points, t-statistic of 4.25), but not for dividends paid
3 months ago or 9 months ago. For annual dividends, the results are somewhat weaker payment
12 months ago generates abnormal returns of 57 basis points, although the t-statistic is only 1.75,
but there are no abnormal returns for 3, 6 or 9 months ago. These weak results may be partly due
to the small number of annual dividend observations (only 0.48% of dividend months are annual,
and each annual-dividend firm is in the long portfolio only one month per year). In addition,
annual dividends are less predictable than other types of dividends a firm that paid a quarterly

30

dividend 3, 6, 9 or 12 months ago has an 87.6% chance of paying a dividend in the current
month, while a firm that paid an annual dividend 12 months ago has only a 61.5% chance of
paying a dividend in the current month.
5.3 Earnings months, seasonality
If dividend-paying months coincide with earnings announcement months, then the
dividend-month effect may be merely proxying for months with earnings announcements. In
such a case, the dividend month premium ought to disappear once we control for whether the
month had an earnings announcement or not. To investigate this, we split the dividend month
sample into those months with an earnings announcement and those without, and compare the
within-companies portfolio for each category.
Another possibility is that the dividend month premium is measuring the effects of
seasonality, as in Heston and Sadka (2008). This result finds that monthly returns at 12 month
intervals tend to predict returns in the current month. They form their portfolios based on the
average returns of the stock from 12, 24, 36, 48 and 60 months ago. To test whether this effect is
driving our results, we form a two-way sort, based on predicted dividend payment, and also on
whether companies are above or below the median of the Heston and Sadka (2008) variable. We
then regress these returns on the excess market return, SMB, HML and UMD portfolios.
We test these predictions in Table VII, and find that neither earnings months nor
seasonality explain the dividend month announcement premium. For earnings, the withincompanies dividend month premium is 30.9 basis points in months with earnings
announcements, versus 45.0 basis points per month for non-earnings months, with the double
difference portfolio having negative returns that are somewhat significant (-14.1 basis points,
t-statistic of -2.06). While we do not have a clear explanation for why the dividend premium
31

should be higher in non-earnings months, this result does clearly indicate that the dividend
month effect is not limited to earnings months alone, as under an earnings announcement effect.
For the Heston and Sadka (2008) double sort, the dividend month premium is 7.4 basis points
higher in the high Heston and Sadka (2008) firms, but the difference is not significant. The
dividend month premium is positive and significant in all specifications earnings and nonearnings months, high and low seasonality.
5.4 Dividend news
Another possibility is that the dividend month premium is masking an effect related to
news about the dividends. A number of papers have examined whether news in dividends, such
as increases, decreases, omissions and initiations, is able to predict future returns and earnings.7
We examine below whether the results differ in months following past dividend increases,
decreases, omissions, and constant dividends. To keep the timing of changes consistent, we
restrict the study to quarterly dividends, and examine cases when a given month is predicted to
have a dividend and there was also a dividend increase (or decrease or omission, respectively) in
the previous 12 months. Companies with a constant dividend are companies without any
increase, decrease or omission in dividends in the previous 12 months. We then compare these
portfolios to the returns of companies with past dividend increases (decreases, omissions,
constant dividends) that are not predicted to pay a dividend this month. As before, we regress
these returns on Mkt-Rf, SMB, HML and UMD portfolios.
Table VIII presents these results. The dividend month premium is positive and significant
for all categories of past dividend changes when dividends were actually paid: increases,
7

For the effects of dividend news on earnings, see Fama and French (1998), Fama and French (2000), Liu, Szewcyk
and Zantout (2008), Fuller and Goldstein (2011). For the effect on future earnings, see Bernartzi, Michaely and
Thaler (1997), DeAngelo, DeAngelo and Skinner (1996), Nissim and Ziv (2001), and Grullon, Michaely, Benartzi
and Thaler (2005).

32

decreases and constant dividends. The monthly abnormal returns for the within-companies
portfolio are 44.7 basis points for dividend increases, 39.7 basis points for constant dividends,
and 72.9 basis points for dividend decreases. This indicates that the effect is not simply a proxy
for the sign of dividend news. By contrast, there is no dividend premium when the company
omitted dividend payment. This is important, as it suggests that the abnormal returns are coming
from the dividend payments themselves, and when dividends disappear, so does the anomaly.
Another way to examine whether the main results are proxying for dividend news is to
examine how persistent the effects are over time. The more stale the dividend information is, the
less likely that it still contains value-relevant news about the dividends. To examine this
question, we use earlier time periods to predict current dividend payments. We use the definition
of predicted dividend in lag year and other companies with dividend in lag year (similar to the
within companies definition) and lag these values by 12, 24, 36 months etc. For instance, a lag of
60 means that a company has a predicted dividend if it paid a dividend 63, 66, 69 or 72 months
ago, while other companies with dividend in lag year paid a dividend 61, 62, 64, 65, 67, 68,
70 or 71 months ago. To make sure that the survivorship bias is the same between the long and
short portfolios, we restrict the sample to include only firms with data from lag month+12. We
examine the returns to the long/short portfolios regressed on a four-factor model as before.
Table IX presents these results. Abnormal returns are present using up to 20 year old
dividend data for equal-weighted portfolios (10.4 basis points per month, with a t-statistic of
3.35), and up to 16 year old data for the value-weighted portfolio The returns gradually become
smaller in both magnitude and significance, as some past dividend payers stop paying dividends
and other past non-payers initiate payments. Fig. 6 shows the abnormal returns to portfolios
formed on a simpler definition of paying any dividend at each monthly horizon. In these figures,

33

portfolios are formed that are long if a company paid a dividend X months ago and short if the
company did not. The figures plot the four-factor intercepts for equal-weighted portfolios in
Panel A and value-weighted portfolios in Panel B. The results are difficult to reconcile with the
effect being driven by dividend news, unless the news has persistent effects at a 20 year horizon.
5.5 Calendar and seasonal effects, sub-periods
Finally, we examine whether the returns are concentrated in certain months of the year
such as January, hold only in particular sub-periods, or have been eliminated in recent years. We
investigate these possibilities in Table X. Panel A presents the standard within companies
results using only returns from each calendar month of the year. The results show that the returns
are not concentrated in any particular month of the year, and the abnormal returns are significant
at a 5% level in 10 out of the 12 calendar months and significant at a 10% level in all months.
Panel B examines the returns to the within companies strategy during four sub-periods: 19261945, 1946-1965, 1966-1985 and 1986-2011. The equal-weighted portfolio had economically
and statistically significant four-factor alphas in all four sub-periods, ranging from 79 basis
points per month during 1926-1945 to 21 basis points per month during 1946-1965.
6. Conclusion
In this paper, we document a robust price pattern companies have predictably higher
returns in months when they are expected to pay a dividend. Simple difference portfolios
produce abnormal returns of 37 to 53 basis points per month relative to a four-factor model, with
some specifications producing abnormal returns as high as 115 basis points per month. We
argue that the effect is consistent with price pressure from dividend-seeking investors in the leadup to the ex-day. Consistent with this explanation, there are substantial returns in the interim

34

period between announcement and ex-day (around 31% of the total returns of the dividend
period), and significant reversals in the 40 days after the ex-dividend day.
We argue that a price pressure from dividend-seeking investors is consistent with models
of dividend clienteles (such as tax-related trading) and dividend catering. But our results pose a
puzzle why do dividend-seeking investors, regardless of underlying motivation, not purchase
the stock slightly earlier, securing both the dividend and the abnormal returns? Given that the
median duration between the dividend announcement and the ex-day is only ten days, and those
days contain substantial abnormal returns, it is not clear why investors who planned on buying
before the ex-day do not buy the share a few days earlier. This question is challenging, both from
the perspective of investor rationality and models of dividend payment, and one for which we do
not have a clear answer.
Our results also have implications for corporate finance. Models such as Brennan (1970)
and Green and Hollifield (2003) argue that if the marginal investor pays personal taxes, and the
present value of the tax liability is incorporated in equity prices, then dividends will raise the
firms cost of capital. The conclusion from these models will be altered, however, if taxable
investors can costlessly avoid receiving the dividend by selling the share to tax-free investors
before the ex-day in exchange for full value. The evidence in this paper is consistent with the
existence of frictions in the trades occurring before the ex-day (which are required for investors
to transfer the taxable dividends). In other words, these trades do not appear to be costless, but
instead involve a leakage of value.
Stock returns during dividend months represent a substantial asset-pricing anomaly. The
dividend month premium is as large as the value premium, but with less volatility. It survives a
wide battery of control variables. It holds on both a value-weighted and equal-weighted basis. It

35

is driven mainly by the long side of the portfolio. It is highly persistent, and abnormal returns are
available sorting on 20 year old data. Because of its operation within a given set of companies, it
appears unlikely to be driven by risk. These facts do not seem to be broadly appreciated in the
literature that examines dividends and stock returns as a way of understanding why firms pay
dividends in the first place. Our results appear at odds with market efficiency, and suggest that
prices are not fully incorporating information about the predictable component of dividend
payments.

References
Allen, F., Bernardo, A.B., and Welch, I., 2000. A theory of dividends based on clienteles. Journal of Finance 55,
2499-2536.
Allen, F., and Michaely, R., 2003. Payout policy. In: North-Holland Handbook of Economics ed.
G. Constantinides, M. Harris, and R. Stulz, Amsterdam: Elsevier North Holland, Chapter 7, 337-429.
Amihud, Y., 2002. Illiquidity and stock returns: cross-section and time series effects. Journal of Financial Markets
5, 31-56.
Baker, M., and Wurgler, J., 2004. A catering theory of dividends. Journal of Finance 59, 1125-1165.
Bali, R., and Hite, G.L., 1998. Ex-dividend day stock behavior: Discreteness or tax-induced clienteles.
Journal of Financial Economics 47, 127-159.
Beaver, W. H, 1968. The information content of annual earnings announcements. Journal of Accounting
Research 6, 67-92.
Becker, B., Ivkovi, Z., and Weisbenner, S., 2011. Local dividend clienteles. Journal of Finance 66,
655-683.
Bell, L., and Jenkinson, T., 2002. New evidence on the impact of dividend taxation and on the identity of
the marginal investor. Journal of Finance 3, 1321-1346.
Bernartzi, S., Michaely, R., and Thaler, R.,1997. Do changes in dividends signal the future or the
past?. Journal of Finance, 3, 1007-1034.
Bernheim, B. D., 1991. Tax policy and the dividend puzzle. RAND Journal of Economics, 22, 455-476.
Black, F., and Scholes, M.S., 1974. The effects of dividend yield and dividend policy on common stock
prices and returns. Journal of Financial Economics, 1, 1-22.
Brennan, M. J., 1970. Taxes, market valuation and financial policy. National Tax Journal 3, 417-429.
Campbell, J. A., and Beranek, W., 1955. Stock price behavior on ex-dividend dates. Journal of

36

Finance, 10, 425-429.

Chordia, T., Roll, R., and Subrahmanyam, A., 2008. Liquidity and market efficiency. Journal of
Financial Economics 87, 249-268.
Da, Z., Engelberg, J., and Gao, P., 2011. In search of attention. Journal of Finance 66, 1461-1499.
Daniel, K., Grinblatt, M., Titman, S., and Wermers, R., 1997. Measuring mutual fund performance with
characteristic-based benchmarks. Journal of Finance 52, 1035-1058.
DeAngelo, H., DeAngelo, L., and Skinner, D.J., 1996. Reversal of fortune: Dividend signaling and the
disappearance of sustained earnings growth. Journal of Financial Economics 40, 341-371.
DeBondt, W. F. M., and Thaler, R.H., 1985. Does the stock market overreact?. Journal of Finance 40,
793-805.
Dubofsky, D. A., 1992. A market microstructure explanation for ex-day abnormal returns. Financial
Management 21, 32-43.
Eades, K. M., Hess, P.J., and Kim, E.H., 1985. Market rationality and dividend announcements. Journal of
Financial Economics 14, 581-605.
Elton, E. J., and Gruber, M.J., 1970. Marginal stockholder tax rates and the clientele effect. The Review
of Economics and Statistics 52, 68-74.
Elton, E. J., Gruber, M.J., and Blake, C.R., 2005. Marginal stockholder tax effects and ex-dividend price behavior:
Evidence from taxable versus nontaxable closed-end funds. The Review of Economics and Statistics 87,
579-586.
Fama, E. F., 1970. Efficient capital markets: A review of theory and empirical work. Journal of Finance 25,
383-417.
Fama, E. F. and French, K.R., 1992. The cross-section of expected stock returns. Journal of Finance 47, 427-465.
Fama, E. F. and French, K.R., 1993. Common risk factors in the returns on stocks and bonds. Journal of Financial
Economics 33, 3-56.
Fama, E. F. and French, K.R., 1998. Taxes, financing decisions, and firm value. Journal of Finance 53, 819-843.
Fama, E. F. and French, K.R., 2000. Forecasting profitability and earnings. Journal of Business 73, 161-175.
Felixson, K. and Liljeblom, E., 2008. Evidence of ex-dividend trading behavior by investor tax category.
European Journal of Finance 14, 1-21.
Frank, M., and Jagannathan, R., 1998. Why do stock prices drop by less than the value of the dividend? Evidence
from a country without taxes. Journal of Financial Economics 47, 161-188.
Frazzini, A., and Lamont, O., 2006. The earnings announcement premium and trading volume. NBER Working
Paper Series no. 13090.
Fuller, K. P., and Goldstein, M.A., 2011. Do dividends matter more in declining markets?. Journal of Corporate
Finance 17, 457-473.
Graham, J. R., Koski, J.L., and Loewenstein, U., 2006. Information flow and liquidity around anticipated and
unanticipated dividend announcements. Journal of Business 79, 2301-2336.
Graham, J. R., and Kumar, A., 2006. Do dividend clienteles exist? Evidence on dividend preferences of retail

37

investors. Journal of Finance 61, 1305-1336.

Graham, J. R., Michaely, R., and Roberts, M.R., 2003. Do price discreteness and transactions costs affect stock
returns? Comparing ex-dividend day pricing before and after decimalization. Journal of Finance 58,
2611-2635.
Green, R. C., and Hollifield, B., 2003. The personal-tax advantages of equity. Journal of Financial Economics 67,
175-216.
Green, R. C., and Rydqvist, K., 1999. Ex-day behavior with dividend preferences and limitations to short-term
arbitrage: the case of Swedish lottery bonds. Journal of Financial Economics 53, 145-197.
Greenwood, R., 2005. Short- and long-term demand curves for stocks: Theory and evidence on the dynamics of
arbitrage. Journal of Financial Economics 75, 607-649.
Grullon, G., Michaely, R., Benartzi, S., and Thaler, R.H., 2005. Dividend changes do not signal changes in future
profitability. Journal of Business 78, 1659-1682.
Harris, L. E., Hartzmark, S.M., and Solomon, D.H., 2012. Juicing the dividend yield: mutual funds and the demand
for dividends. Working Paper.
Heston, S. L., and Sadka, R., 2008. Seasonality in the cross-section of stock returns. Journal of Financial
Economics 87, 418-445.
Hong, H., Lim, T., and Stein, J.C., 2000. Bad news travels slowly: Size, analyst coverage, and the profitability of
momentum strategies. Journal of Finance 55, 265-295.
Jegadeesh, N., 1990. Evidence of predictable behavior of security returns. Journal of Finance 45,881898.
Jegadeesh, N., and Titman, S., 1993. Returns to buying winners and selling losers: implications for stock market
eciency. Journal of Finance, 48, 6591.
John, K., and Williams, J., 1985. Dividends, dilution, and taxes: a signaling equilibrium. Journal of Finance 40,
1053-1070.
Kalay, A., and Loewenstein, U.,1985. Predictable events and excess returns the case of dividend announcements.
Journal of Financial Economics 14, 423-449.
Kalay, A., and Loewenstein, U., 1986. The informational content of the timing of dividend announcements. Journal
of Financial Economics 16, 373-388.
Kalay, A., and Michaely, R., 2000. Dividends and taxes: A re-examination. Financial Management 29, 55-75.
Karpoff, J. M., and Walkling, R.A., 1988. Short-term trading around ex-dividend days. Journal of Financial
Economics 21, 291-298.
Karpoff, J. M., and Walkling, R.A., 1990. Dividend capture in NASDAQ stocks. Journal of Financial Economics 28,
39-65.
Keim, D. B., 1983. Size-related anomalies and stock return seasonality: Further empirical evidence. Journal of
Financial Economics 12, 13-32
Koski, J. L. and Scruggs, J.T., 1998. Who trades around the ex-dividend day? Evidence from the NYSE audit file
data. Financial Management 27, 58-72.
Lakonishok, J.,, and Vermaelen, T.,1986. Tax-induced trading around ex-dividend days. Journal of Financial

38

Economics 16, 287-319.

Li, W., and Lie, E., 2006. Dividend changes and catering incentives. Journal of Financial Economics 80, 293-308.
Litzenberger, R. H., and Ramaswamy, K.,1979. The effects of personal taxes and dividends on capital asset prices:
Theory and empirical evidence. Journal of Financial Economics 7, 163-195.
Litzenberger, R. H., and Ramaswamy, K., 1980. Dividends, short-selling restrictions, tax-induced investor clienteles
and market equilibrium. Journal of Finance 35, 469-482.
Litzenberger, R. H., and Ramaswamy, K., 1982. The effects of dividends on common stock prices tax effects or
information effects?. Journal of Finance 37, 429-443.
Liu, Y., Szewcyk, Z.H., and Zantout, Z., 2008. Underreaction to dividend reductions and omissions?. Journal of
Finance 63, 987-1020.
McDonald, R. L., 2001. Cross-border investing with tax arbitrage: The case of German dividend tax credits, Review
of Financial Studies 14, 617-657.
Michaely, R., and Vila, J., 1996. Trading Volume with Private Valuation: Evidence from the ex-dividend
day. Review of Financial Studies 9, 471-509.
Michaely, R., Vila, J., and Wang, J., 1996. A model of trading volume with tax-induced heterogeneous valuation
and transaction costs. Journal of Financial Intermediation 5, 340371.
Miller, M. H., and Modigliani, F., 1961. Dividend policy, growth, and the valuation of shares. Journal of
Business 34, 411-433.
Miller, M.H., and Scholes, M.S., 1982. Dividends and taxes: Empirical evidence. Journal of Political Economy 90,
1118-1141.
Nissim, D., and Ziv, A., 2001. Dividend changes and future profitability. Journal of Finance 56, 2111-2134.
Pastor, L., and Stambaugh, R.F., 2003. Liquidity risk and expected stock returns. Journal of Political Economy 111,
642-685.
Rantapuska, E., 2007. Ex-dividend day trading: Who, how, and why? Evidence from the Finnish market.
Journal of Financial Economics 88, 355-374.
Savor, P., and Wilson, M., 2011. Earnings announcements and systematic risk. Working Paper.
Shiller, R. J., 1981. Do stock prices move too much to be justified by subsequent changes in dividends?. American
Economic Review 71, 421-36.
Shleifer, A., 1986. Do demand curves for stocks slope down?. Journal of Finance 41, 579-590.
Thaler, R. H., 1980, Towards a positive theory of consumer choice. Journal of Economic Behavior and
Organization 1, 39-60.
Wurgler, J., and Zhuravskaya, E., 2002. Does arbitrage flatten demand curves for stocks?. Journal of Business 75,
583-608.

39

Table I - Summary Statistics

Panel A - Firms with a Dividend in the Past Year
Market Cap ($m)

N
1,359,690

Mean
1,739

Std. Dev.
10,457

25%
33

Median
121

75%
564

Book-to-Market

950,171

0.8098

0.5561

0.4415

0.6862

1.0380

Turnover
Bid-Ask Spread

1,262,032
563,930

0.5118
0.0239

0.9443
0.0381

0.1060
0.0042

0.2443
0.0134

0.5671
0.0302

Dividend Yield
4,448
Number of Firm Months 1,359,690

0.0150

0.0590

0.0036

0.0069

0.0143

Number of Firms

8,894
Panel B - Firms with No Dividend in the Past Year

Market Cap ($m)

N
718,726

Mean
894

Std. Dev.
6,308

25%
33

Median
113

75%
436

Book-to-Market

611,835

0.5959

0.9433

0.2471

0.4505

0.7714

Turnover
Bid-Ask Spread

688,811
514,907

1.3737
0.0250

2.0701
0.0428

0.2887
0.0027

0.7404
0.0134

1.7160
0.0324

Number of Firm Months

Number of Firms

718,726
13,578

Panel C - Distribution of Dividend Frequencies

Pct of Firm/Months with
Dividend in the Last
Year
65.42

Pct of
Dividend
Observations

0.17
56.61

0.70
89.25

Semi-Annual
Annual

2.00
1.07

1.50
0.48

Unknown Frequency

7.46

8.09

Dividend Frequency
Any Frequency
Monthly
Quarterly

This Table presents summary statistics for companies according to whether they paid a dividend in the past
12 months, using monthly data from January 1927 to December 2011. Panel A presents information for
companies that paid a cash dividend in the past 12 months, and Panel B presents information for companies
that did not pay a cash dividend in the past 12 months. Panel C presents examines the distribution of dividend
frequencies

40

Table II - Returns and the Probability of Current

Dividend Payment, Sorted By Timing of Past
Dividends
Panel A - Raw Returns and Dividend Payments

Months Since
Dividend
Payment
1

Returns in Current
Month Given Dividend
Payment N Months
Ago
Mean
Std.
Return
Deviation
1.06
9.72

Probability of Dividend
in Current Month Given
Dividend Payment N
Months Ago
All
Quarterly
Dividends Dividends
0.009
0.001

2
3
4

1.18
1.41
1.03

9.81
9.61
9.73

0.060
0.853
0.062

0.053
0.879
0.054

5
6
7

1.20
1.43
1.04

9.84
9.65
9.75

0.066
0.853
0.067

0.057
0.862
0.058

8
9
10

1.18
1.40
1.03

9.87
9.64
9.78

0.064
0.835
0.065

0.056
0.855
0.057

11
12

1.17
1.43

9.87
9.65

0.050
0.881

0.040
0.879

This Table presents the monthly stock returns of companies according to the timing of the past dividend
payments, using monthly data from January 1927 to December 2011. Panel A examines the average returns
and probability of dividend payment in the current month based on payment of dividends in previous months.
In Panel A, averages are taken over all firm/month combinations. Months lagged indicates a company had a
dividend lagged the indicated number of months in the past. All Dividends refers to all regular cash
dividends paid in US dollars (distributions with the first two digits of the CRSP DISTCD variable equal to 12
with the third digit less than 6). Quarterly Dividends refers only to quarterly cash dividends. Panel B
presents the distribution of returns according to companies predicted to pay a dividend this month, companies
who paid a dividend in the past 12 months but are not predicted to pay in the current month, and companies
that didnt pay a dividend in the past 12 months. In Panel B, returns are time-series averages for portfolios,
formed by aggregating companies into portfolios each month. Dividends are predicted in the current month if
a quarterly dividend was paid 3, 6, 9, or 12 months ago, if a semi-annual dividend was paid 6 or 12 months
ago, or if an annual dividend was paid 12 months ago. The Sharpe Ratio is equal to average returns minus the
risk free rate, divided by the standard deviation of returns. All columns listing percentiles are for monthly
returns.

41

Panel B - Returns Based on Predicted Dividends

Mean
Std.
Sharpe
Return Deviation Ratio

1%

5%

25%

Median

75%

95%

99%

[1] Predicted Dividend

Month

1.38

5.76

0.188

-15.99

-7.25

-1.29

1.67

4.29

8.86

15.78

[2] All Other Companies

with a Dividend in the Last
12 Months

1.02

5.75

0.125

-16.22

-8.07

-1.57

1.48

3.92

8.36

14.78

[3] All Other Companies

with NO Dividend in the
Last 12 Months

1.01

8.52

0.084

-22.87

-12.57

-3.37

1.39

5.41

13.15

20.75

Portfolio Long [1] and

Short [2]

0.36

0.71

0.098

-1.24

-0.75

-0.07

0.33

0.74

1.51

2.36

Portfolio Long [1] and

Short [3]

0.37

3.80

0.021

-10.52

-5.76

-1.42

0.38

2.28

6.17

9.45

42

Table III - Abnormal Returns in Predicted Dividend Months

Panel A - Four Factor Alphas For Difference Portfolios Based on Predicted Dividends
Equal Weighted
Long

Predicted
Dividend

All Other
Short Companies
Long

0.406 ***
(8.68)

Short -0.123 ***

(-3.37)
Difference

0.528 ***
(12.43)

Predicted
Dividend
All Other Past
Dividend
payers
0.406 ***
(8.68)
0.038
(0.82)
0.366 ***
(15.48)

Value Weighted
Predicted
Dividend
Dividend 1,
4, 7, or 10
Months Ago
0.406 ***
(8.68)
-0.044
(-0.91)
0.448 ***
(16.39)

Predicted
Dividend
All Other
Companies
0.234 ***
(6.82)
-0.079 ***
(-4.41)
0.313 ***
(6.64)

Predicted
Dividend
All Other Past
Dividend
payers
0.234 ***
(6.82)
-0.047 *
(-1.70)
0.280 ***
(6.64)

Predicted
Dividend
Dividend 1,
4, 7, or 10
Months Ago
0.234 ***
(6.82)
-0.175 ***
(-4.43)
0.409 ***
(8.09)

This table presents the results of Fama French 4 Factor regressions of US monthly stock returns based on predicted dividend payment. Portfolios of stock
returns are formed based predicted dividend payments, and these are regressed on excess market returns, SMB, HML, and UMD (available from Ken
Frenchs website), and in some cases the Pastor and Stambaugh (2003) liquidity factor. Both equal weighted and value weighted portfolios are formed.
To be included in the long portfolio a stock needs to have a predicted dividend. A predicted dividend month has a quarterly or unknown dividend 3, 6, 9
or 12 months ago, a semi-annual dividend 6 or 12 months ago, or an annual dividend 12 months ago. Stocks with monthly dividends in the previous 12
months are excluded from the analysis. For the short portfolios, "All Other Companies" contains all companies not included in the long portfolio, "All
Other Companies with a Dividend in the Last 12 Months" contains companies that are not in the long portfolio, but have paid at least one dividend in the
last 12 months, and "All other companies with a Dividend in Lag1, Lag 4, Lag7, and/or Lag10 Months" contains companies not in the long portfolio with
a dividend in at least one of the months occurring 1,4,7 or 10 months ago. Panel A presents only the intercepts from 4 factor regressions, for the various
long and short portfolios as labeled, with Difference being a portfolio long in the predicted dividend portfolio and short the labeled short portfolio.
Panel B presents the intercepts for regressions of excess portfolio returns on a CAPM model (excess market returns only), 3 factor regressions (excess
market returns, SMB, and HML), 4 factor regressions (excess market returns, SMB, HML and UMD) and 4 factor plus liquidity (excess market returns,
SMB, HML UMD and liquidity). To be included in these regressions a company needs a non-missing return from 12 months ago. Regressions are run on
monthly returns of NYSE, Amex and NASDAQ common shares, from January, 1927 to December 2011. A dividend is defined as the first two digits of
the CRSP DISTCD variable equal to 12 with the third digit less than 6. The top number is the coefficient, the lower number in parentheses is the tstatistic, and *, ** and *** indicate statistical significance at the 10%, 5% and 1% level respectively.
43

Panel B - Factor Loadings from Fama French 4 Factor Difference Portfolios

Long Predicted Dividend, Short All Other Companies
Long
Long
Short
Difference

CAPM
Alpha

3-Factor
Alpha

4-Factor
Alpha

0.472 ***
(7.74)

0.361 ***
(7.87)

0.406 ***
(8.68)

0.000
(-0.53)

-0.002 ***
(-4.47)

-0.001 ***
(-3.37)

-0.001 **
(-2.57)

0.507 ***
(10.31)

0.519 ***
(12.57)

0.528 ***
(12.43)

0.511 ***
(10.36)

4-Factor +
Liq. Alpha
0.404 ***
(6.35)

MktRf

SMB

HML

UMD

Liquidity

0.890 ***
(61.92)

0.417 ***
(20.62)

0.418 ***
(19.03)

-0.051 ***
(-3.59)

-0.034 **
(-1.99)

0.970 ***
(104.04)

0.682 ***
(51.89)

0.167 ***
(11.73)

-0.078 ***
(-8.47)

-0.014
(-1.26)

-0.081 ***
-0.265 ***
(-7.27)
(-16.90)

0.251 ***
(14.76)

0.027 **
(2.48)

-0.020
(-1.52)

Long Predicted Dividend, Short All Other Companies With Dividend in the Last Year
CAPM
Alpha

3-Factor
Alpha

4-Factor
Alpha

Long

0.472 ***
(7.74)

0.361 ***
(7.87)

0.406 ***
(8.68)

Short

0.113 *
(1.90)

0.009
(0.21)

0.038
(0.82)

Long

Difference

0.355 ***
(15.39)

0.349 ***
(15.10)

0.366 ***
(15.48)

4-Factor +
Liq. Alpha
0.404 ***
(6.35)

MktRf

SMB

HML

UMD

Liquidity

0.890 ***
(61.92)

0.417 ***
(20.62)

0.418 ***
(19.03)

-0.051 ***
(-3.59)

-0.034 **
(-1.99)

-0.024
(-0.38)

0.892 ***
(63.50)

0.412 ***
(20.82)

0.420 ***
(19.57)

-0.053 ***
(-3.83)

-0.019
(-1.16)

0.428 ***
(17.03)

-0.002
(-0.42)

0.005
(0.68)

-0.002
(-0.26)

0.002
(0.40)

-0.015 **
(-2.19)

44

Table IV - Daily Abnormal Returns Around Dividend Months

Panel A - Average Characteristic-Adjusted Returns
Declaration
Day
0.116 ***
(24.25)

Predicted
Declaration
Day
0.031 ***
(7.14)

Interim
Period
0.166 ***
(12.91)

Ex-Day
0.262 ***
(63.40)

Declaraction
40 Days
to Ex-Day
After Ex-Day
0.536 ***
-0.719 ***
(38.09)
(-32.65)

Panel B - Liquidity and Daily Characteristic-Adjusted Returns

Declaration
Day
Constant
0.107 ***
(13.07)

Length of Interim Period

Interim
Declaraction
40 Days
Period
Ex-Day
to Ex-Day
After Ex-Day
0.339 ***
0.292 ***
0.728 ***
-0.897 ***
(14.74)
(32.08)
(28.68)
(-21.05)

Days in Interim
Period (/10)

0.01
(1.49)

R2

0.000

0.000

N 283,166

282,795

Declaration
Day
Constant

0.107 ***
(17.51)

-0.12 ***
(-6.34)

Interim
Period

-0.02 ***
(-5.07)

-0.14 ***
(-6.96)

0.000

0.000

0.13 ***
(6.22)
0.000

284,406
284,406
Amihud Illiquidity
Declaraction
Ex-Day
to Ex-Day

284,414
40 Days
After Ex-Day

0.185 ***
(7.06)

0.188 ***
(26.13)

0.473 ***
(16.15)

-0.577 ***
(-9.56)
-72.92 ***
(-3.61)

Amihud Illiquidity
Measure

2.07
(0.45)

26.51 ***
(3.47)

18.19 ***
(4.23)

44.06 ***
(3.76)

R2

0.000

0.000

0.001

0.000

0.000

N 245,553

245,425

246,648

246,648

246,603

This table examines daily characteristic-adjusted returns in periods around dividend months. Each adjusted return takes
the companys stock return and subtracts off the returns of a portfolio matched on quintiles of market capitalization,
book-to-market ratio and momentum. A predicted declaration date is 63 trading days after the previous declaration
date. Panel A presents the average returns in each period: the declaration day, the interim period (1 day after
declaration to 1 day before the ex-day, inclusive), the ex-dividend day, and the 40 days after the ex-dividend day).
Panel B takes the same set of returns, regresses them on two measures of liquidity: the number of days in the interim
period (divided by 10), and the liquidity measure used in Amihud (2002) :

, where VOLD is the dollar

volume that day, and D is the number of days that the stock traded (over the past 250 days) Regressions are run on
daily returns of NYSE, Amex and NASDAQ common shares, from January 1927 to December 2011. The top number
is the coefficient, the lower number in parentheses is the t-statistic, and *, ** and *** indicate statistical significance at
the 10%, 5% and 1% level respectively.

45

Table V - Daily Abnormal Returns, Economic Uncertainty and

Dividend Yield
Dividend Yield
Declaration
Day
Constant
0.001 ***
(10.89)
Dividend Yield
0.000
(0.03)
R2

0.000
N 280,825

Declaration
Day
Constant
0.118 ***
(21.75)
Recessions -0.013
(-0.80)
R2

0.000
N 283,166

Declaration
Day
Constant
0.069 ***
(2.65)
VIX(/10)
0.012
(0.93)
R2

0.000
N 136,045

Interim
Period
-0.002 ***
(-4.71)

Ex-Day
0.002 ***
(15.95)

0.404 ***
(10.67)

0.070 ***
(4.28)

0.033
(0.76)

0.000
282,352
Recessions

0.000
282,352

0.001
280,055
Interim
Period
0.150 ***
(8.87)

Ex-Day
0.249 ***
(37.82)

0.096 **
(2.08)

0.081 ***
(5.51)

0.000
282,795

0.000
284,406
VIX

Interim
Period
-0.372 ***
(-4.72)

Ex-Day
0.146 ***
(5.26)

0.228 ***
(5.60)

0.044 ***
(3.11)

0.001
136,003

0.000
136,647

Declaraction
40 Days
to Ex-Day
After Ex-Day
0.005 ***
-0.002 **
(10.03)
(-2.49)
-0.562 ***
(-5.91)
0.001
282,282

Declaraction
40 Days
to Ex-Day
After Ex-Day
0.511 ***
-0.673 ***
(27.09)
(-21.07)
0.151 ***
(2.99)
0.000
284,406
Declaraction
to Ex-Day
-0.153 *
(-1.79)
0.274 ***
(6.27)
0.001
136,647

-0.282 ***
(-3.09)
0.000
284,414
40 Days
After Ex-Day
-0.048
(-0.39)
-0.371 ***
(-5.84)
0.001
136,632

This table examines daily characteristic-adjusted returns in periods around dividend payment. Each adjusted return
takes the companys stock return and subtracts off the returns of a portfolio matched on quintiles of market
capitalization, book-to-market ratio and momentum. Regressions are run separately for the declaration day, the interim
period (1 day after declaration to 1 day before the ex-day, inclusive), the ex-dividend day, and the 40 days after the exdividend day). The independent variable is either the dividend yield (the average from the previous 12 months of
dividends payment in months that included a dividend, divided by the share price from the previous month), a dummy
variable that equals one if the economy was in recession at that point, or the VIX index measure of market volatility.
Regressions are run on daily returns of NYSE, Amex and NASDAQ common shares, from January 1927 to December
2011. The top number is the coefficient, the lower number in parentheses is the t-statistic, and *, ** and *** indicate
statistical significance at the 10%, 5% and 1% level respectively.

46

Table VI - Abnormal Returns by Dividend Frequency

Dividend N
Months Ago
1

All
-0.055
(-1.23)

Quarterly
-0.062
(-1.11)

Semi-Annual
0.118
(0.60)

Annual
-0.120
(-0.40)

Monthly
0.225
(1.30)

Unknown
0.098
(0.60)

0.203 ***
(4.71)

0.186 ***
(3.73)

0.213
(1.09)

0.414
(1.23)

0.204
(1.10)

0.314 **
(2.03)

0.548 ***
(12.88)

0.636 ***
(11.32)

0.028
(0.15)

0.380
(1.21)

0.200
(1.11)

0.363 **
(2.56)

-0.070 *
(-1.66)

-0.103 **
(-2.03)

-0.342 *
(-1.71)

-0.243
(-0.76)

0.207
(1.18)

-0.003
(-0.01)

0.137
(0.76)

0.029
(0.18)

0.329 *
(1.82)

0.791 ***
(4.24)

0.151 ***
(3.59)

0.128 ***
(2.69)

0.664 ***
(3.81)

-0.345
(-1.01)

0.563 ***
(13.98)

0.539 ***
(11.65)

1.146 ***
(5.70)

0.144
(0.49)

-0.094 **
(-2.26)

-0.116 **
(-2.43)

0.231
(1.07)

-0.323
(-1.09)

0.212
(1.17)

0.050
(0.30)

0.101 **
(2.47)

0.261
(1.37)

-0.712 **
(-2.23)

0.318 *
(1.69)

0.503 ***
(3.10)

0.498 ***
(12.68)

0.505 ***
(10.93)

0.427
(1.31)

0.382 **
(2.03)

0.238
(1.34)

10

-0.112 ***
(-2.75)

-0.159 ***
(-3.26)

0.372 *
(1.72)

0.701 **
(2.23)

0.212
(1.15)

-0.064
(-0.37)

11

0.126 ***
(3.11)

0.110 **
(2.48)

0.272
(1.45)

0.241
(0.70)

0.232
(1.25)

0.158
(0.86)

12

0.494 ***
(12.10)

0.484 ***
(10.21)

0.837 ***
(4.25)

0.567 *
(1.75)

0.450 **
(2.35)

0.568 ***
(3.47)

0.073
(1.60)

-0.102
(-0.52)

This table presents the results of Fama French 4 Factor regressions of US monthly stock returns based on the timing
of past dividend payments of different frequencies. Dividend N Months Ago means that the portfolio of returns is
formed based on companies who paid a dividend of the given type N months earlier. Dividend types are from CRSP
classifications of the dividend as quarterly, semi-annual, annual, monthly, or unknown, with All including all
these categories. Each combination of dividend type and time since the dividend is the output of a separate
regression of portfolio returns on a Fama French 4 Factor Model (excess market returns, SMB,HML and UMD
portfolios). The dependent variable is the returns of an equal weighted portfolio that is long all companies who paid
a dividend of the given type in the given earlier period, and short all companies who did not pay any dividend in
that month. Regressions are run on monthly returns of NYSE, Amex and NASDAQ common shares, from January
1927 to December 2011. The top number is the coefficient, the lower number in parentheses is the t-statistic, and *,
** and *** indicate statistical significance at the 10%, 5% and 1% level respectively.

47

Table VII - Double-Sorted Portfolios on Predicted

Dividends, Earnings Months and Seasonality
Predicted
Dividend

Other Past
Dividend
Payers

Difference

Earnings Month

0.647 ***
(7.35)

Non-Earnings Month

0.325 ***
(4.74)

Difference

0.322 ***
(4.40)

0.463 ***
(6.90)

-0.141 **
(-2.06)

Above Median Heston-Sadka

(2008) Seasonality

0.581 ***
(10.84)

0.275 ***
(5.33)

0.312 ***
(10.09)

Below Median Heston-Sadka

(2008) Seasonality

0.143 ***
(2.70)

Difference

0.438 ***
(9.06)

0.338 ***
(4.17)
-0.125 *
(-1.84)

-0.091 *
(-1.77)
0.365 ***
(7.73)

0.309 ***
(5.07)
0.450 ***
(14.62)

0.238 ***
(6.28)
0.074
(1.59)

This table presents the results of Fama French 4 Factor regressions of US monthly stock returns double sorted on
predicted dividend payment and other company characteristics. All portfolios are equal-weighted, and monthly stock
returns are regressed on monthly excess market returns, SMB, HML and UMD, with the intercept from these
regressions being shown. Rows and columns other than Difference show the intercept from four factor regressions that
are long in the portfolio indicated in the row or heading. Difference gives the intercept from a four factor regression
that is long the portfolio in the top row (or left column) and short the portfolio in the bottom row (or right column).
Predicted Dividends is a portfolio of stocks that paid a quarterly or unknown dividend 3, 6, 9 or 12 months ago, a
semi-annual dividend 6 or 12 months ago, or an annual dividend 12 months ago. Stocks with monthly dividends in the
previous 12 months are excluded from the analysis. For the short portfolios, "Other Past Dividend Payers" contains all
companies that paid a dividend in the past 12 months but are not expected to pay a dividend this month under the above
definition. Earnings months indicate a month that a company reported earnings. The Heston and Sadka (2008)
Seasonality variable is taken as the average return for the stock from 12, 24, 36, 48 and 60 months ago. Each month
stocks are sorted according to whether they are above or below the median value for this variable in that month, and
split into two portfolios accordingly. Regressions are run on monthly returns of NYSE, Amex and NASDAQ common
shares, from January 1927 to December 2011. The top number is the coefficient, the lower number in parentheses is the
t-statistic, and *, ** and *** indicate statistical significance at the 10%, 5% and 1% level respectively.

48

Table VIII - Dividend News and Abnormal Returns in

Predicted Dividend Months
Long

Short

Predicted
Dividend,
Dividend
Increase in
Last
year
All Other
Companies
with
Dividend
Increase in
Last Year

Predicted
Dividend,
Constant
Dividend in
Last
year
All Other
Companies
with
Constant
Dividend in
Last Year

Long

0.860 ***
(7.98)

0.485 ***
(9.10)

Short

0.429 ***
(4.99)

0.066
(1.25)

Difference

0.447 ***
(4.16)

0.397 ***
(12.47)

Predicted
Dividend,
Dividend
Decrease in
Last
year
All Other
Companies
with
Dividend
Decrease in
Last Year

Predicted
Dividend,
Dividend
Missed in Last
year
All Other
Companies
with Missed
Dividend in
Last Year

0.407 ***
(2.70)

-0.785 ***
(-3.49)

-0.403 ***
(-3.30)

-0.669 ***
(-3.96)

0.729 ***
(4.19)

-0.008
(-0.03)

This table presents the results of Fama French 4 Factor regressions of US monthly stock returns double sorted on
predicted dividend payment and recent dividend news. All portfolios are equal-weighted, and monthly stock returns
are regressed on monthly excess market returns, SMB, HML and UMD, with the intercept from these regressions
being shown. All long portfolios are companies with a predicted dividend in the current month, meaning that the
stocks paid a quarterly or unknown dividend 3, 6, 9 or 12 months ago, a semi-annual dividend 6 or 12 months ago, or
an annual dividend 12 months ago. In addition, the stocks must also have experienced a dividend increase (column
1), constant dividends (column 2), a dividend decrease (column 3) or dividend omission (column 4) accordingly
some time during the past 12 months. The short portfolio is all stocks who had the same dividend news in the past
year (increase, constant, decrease or omission) but are not predicted to pay a dividend in the current month.
Difference is the difference portfolio of long minus short. Regressions are run on monthly returns of NYSE, Amex
and NASDAQ common shares, from January 1927 to December 2011. The top number is the coefficient, the lower
number in parentheses is the t-statistic, and *, ** and *** indicate statistical significance at the 10%, 5% and 1%
level respectively.

49

Table IX - Long Term Persistance of Dividend Month Premium

Predicted
Dividend in
Long Lag Year

Predicted
Dividend in
Lag Year

Predicted
Dividend in
Long Lag Year

Predicted
Dividend in
Lag Year

Other
Companies
with Dividend
Short in Lag Year

Other
Companies
with Dividend
in Lag Year

Other
Companies
with Dividend
Short in Lag Year

Other
Companies
with Dividend
in Lag Year

Years
Lagged Equal Weight
11
0.126 ***
(4.93)
12
0.143 ***
(5.78)
13
0.096 ***
(3.72)
14
0.134 ***
(5.08)
15
0.125 ***
(4.54)
16
0.111 ***
(4.09)
17
0.112 ***
(4.05)
18
0.122 ***
(4.11)
19
0.104 ***
(3.44)
20
0.104 ***
(3.35)

Value Weight
0.125 ***
(2.82)
0.106 **
(2.34)
0.100 **
(2.12)
0.120 **
(2.57)
0.098 **
(2.02)
0.105 **
(2.14)
0.037
(0.71)
0.045
(0.81)
0.038
(0.70)
0.040
(0.74)

Years
Lagged Equal Weight
1
0.329 ***
(13.82)
2
0.281 ***
(10.73)
3
0.280 ***
(11.20)
4
0.258 ***
(10.71)
5
0.210 ***
(8.65)
6
0.180 ***
(7.46)
7
0.190 ***
(7.97)
8
0.155 ***
(6.36)
9
0.157 ***
(6.44)
10
0.148 ***
(6.11)

Value Weight
0.245 ***
(5.76)
0.258 ***
(5.96)
0.287 ***
(6.59)
0.258 ***
(5.80)
0.232 ***
(5.36)
0.216 ***
(5.15)
0.229 ***
(5.20)
0.199 ***
(4.49)
0.197 ***
(4.50)
0.165 ***
(3.74)

This table presents the results of Fama French 4 Factor regressions of US monthly stock returns sorted on predicted dividend
payment at different horizons. Portfolios are equal-weighted or value-weighted as indicated, and monthly stock returns are
regressed on monthly excess market returns, SMB, HML and UMD. The intercept from these regressions is shown in the
table. The predicted dividend variable selects companies that paid a quarterly or unknown dividend 3, 6, 9 or 12 months ago,
a semi-annual dividend 6 or 12 months ago, or an annual dividend 12 months ago. This variable is then lagged in years by
adding multiples of 12 months to each of the date requirements e.g. a lag of one year means a stock that paid a quarterly
dividend 15, 18, 21 or 24 months ago (and equivalently for semi-annual and annual), a lag of two years means quarterly
dividend payment 27, 30, 33 or 36 months ago, etc. The long portfolio is all stocks with a predicted dividend lagged by that
number of years, while the short portfolio includes all companies that paid a dividend in the 12 months of the lagged year that
arent predicted to pay a dividend (e.g. a lag of 1 year means any dividend payment from 13 to 24 months ago that isnt
predicted to pay a dividend this month). Regressions are run on monthly returns of NYSE, Amex and NASDAQ common
shares, from January 1927 to December 2011. The top number is the coefficient, the lower number in parentheses is the t50
statistic, and *, ** and *** indicate statistical significance at the 10%, 5% and 1% level respectively.

Table X - Calendar, Seasonality and Subperiods

Panel A - Dividend Month Premium by Calendar Month

Month
January

EW, Predicted
Dividend - All Other
Past Dividend Payers

Month

0.343 *
(1.79)

EW, Predicted
Dividend - All Other
Past Dividend Payers

July

0.759 ***
(4.65)

February

0.548 ***
(3.66)

August

0.555 ***
(4.85)

March

0.638 ***
(5.47)

September

0.423 ***
(2.92)

April

0.354 **
(2.56)

May

0.502 ***
(4.34)

November

0.562 ***
(4.13)

June

0.515 ***
(3.70)

December

0.615 ***
(3.29)

October

0.284 *
(1.98)

Panel B - Different Sub-Periods

Period

Equal Weighted

Value Weighted

1926-1945

0.790 ***
(6.36)

0.520 ***
(4.23)

1946-1965

0.214 ***
(4.92)

0.046
(0.53)

1966-1985

0.604 ***
(11.32)

0.468 ***
(5.70)

1985-2011

0.472 ***
(7.65)

0.268 ***
(3.68)

This table presents the results of Fama French 4 Factor regressions of US monthly stock returns sorted on predicted
dividend payment in different calendar months, and in different sub-periods. Monthly stock returns are regressed on
monthly excess market returns, SMB, HML and UMD, with the intercept from these regressions being shown. Predicted
dividends refers to stocks that paid a quarterly or unknown dividend 3, 6, 9 or 12 months ago, a semi-annual dividend 6
or 12 months ago, or an annual dividend 12 months ago. All Other Past Dividend Payers is all companies who paid a
dividend in the past 12 months but are not predicted to pay a dividend this month based on the above formula. The
dividend month premium is the abnormal returns to the difference portfolio long predicted dividend payers and short all
other past dividend payers. Panel A examines the equal-weighted dividend month premium in different calendar months
of the year. Panel B examines the dividend month premium in different sub-periods: 1926-1945, 1946-1965, 1966-1985
and 1986-2011. The top number is the coefficient, the lower number in parentheses is the t-statistic, and *, ** and ***
indicate statistical significance at the 10%, 5% and 1% level respectively.
51

Figure 1 Cumulative Value of the Dividend Month Premium Compared With

Size and Book-to-Market Anomalies

This figure presents the cumulative value for the dividend month premium portfolio compared with the size (SMB)
and book-to-market (HML) portfolios. In each case, the cumulative value of an initial one dollar investment on
December 31, 1927 is plotted on the y-axis, versus the year on the x-axis. The green line is for the withincompanies dividend month premium a portfolio that is long in all companies predicted to pay a dividend this
month, and is short in all companies who paid a dividend in the past 12 months but that are not predicted to pay a
dividend this month. The orange line is the cumulative value of the SMB portfolio and the blue line is the cumulative
value of the HML portfolio, both taken from Ken Frenchs website.

52

Figure 2 Daily Characteristic-Adjusted Returns Around Ex-Dividend Date

Figure 3 Daily Characteristic-Adjusted Returns Around Announcement Date

These figures present daily characteristic-adjusted stock returns around ex-dividend dates (Fig. 2) and dividend
announcement dates (Fig. 3). Each adjusted return takes the companys stock return and subtracts off the returns of a
portfolio matched on quintiles of market capitalization, book-to-market ratio and momentum. Adjusted returns are taken
relative to the ex-dividend date, with negative dates being before the ex-dividend (announcement) date and positive dates
being afterwards. All returns are in percent (e.g. 0. 1 corresponds to 10 basis points). Lines in red have a t-statistic that
53
is significant at the 5% level, and lines in yellow are not significant at a 5% level

Figure 4 Abnormal Volume Around Ex-Dividend Date

Figure 5 Abnormal Volume Around Declaration Date

These figures present the abnormal trading volume around ex-dividend dates (Fig. 4) and dividend declaration dates
(Fig. 5). Abnormal Volume is computed each day as (Volume 250 Day Average Volume)/ 250 Day Average
Volume. This is computed daily for each company, and averaged for each day relative to the ex-dividend date
(declaration date), with negative dates being before the ex-dividend date (declaration date) and positive dates being
afterwards. All returns are in decimals (e.g. 0.1 corresponds to 10 per cent). Lines in red have a t-statistic that is
significant at the 5% level, and lines in yellow are not significant at a 5% level

54

Figure 6 Abnormal Returns for Portfolios of Past Dividend Payers

Panel A Equal Weighted

Panel B Value Weighted

This figure presents the intercepts from four-factor regressions of monthly stock returns for companies that paid a dividend in
previous months. Each point is from a separate regression of a portfolio of monthly stock returns on excess market returns, as
well as SMB, HML and UMD portfolios. The y-axis is monthly abnormal returns, in percent. In Panel A, the results are for
equal-weighted portfolios, and in Panel B they are for value-weighted portfolios. Portfolios are formed for all companies that
paid a dividend of any kind in the number of months prior indicated. When the month is a multiple of three (i.e. paid a dividend
3 months ago, 6 months ago etc.), the bar is red if the intercept has a t-statistic that is significant at the 5% level, and yellow if
the intercept is not significant at the 5% level. When the month is not a multiple of three, the bar is purple if the intercept has a
55
t-statistic that is significant at the 5% level, and black if the intercept is not significant at the 5% level.