What hypotheses might you offer to explain this phenomenon?
It has been found empirically, that on average the total market value of their stock rises when firms announce a dividend. What hypotheses might you offer to explain this phenomenon?
- ?Lv 73 years ago
cos the price of the stock when its announced = the stock price before it was announced plus the value of the dividend
when the dividend gets paid (the stock goes ex-dividend) the stock will drop to the price it was before it went ex-dividend minus the value of the dividend
- Anonymous3 years ago
Stock prices drop by roughly the amount of the dividend, then slowly adjust to reflect the value of the stock. Sometimes investors don't realize that a company just paid a dividend, so they think that the stock is a bargain because it is lower in price. One must also consider that investors must pay tax on dividends, and different investors pay different amounts. Self managed retirement accounts (IRA, 401k, or other tax deferred instruments) won't require immediate payment of tax, and when the tax is eventually paid (after compounding profits (or losses)), the tax should be lower. Taxes have a profound impact on profit of ex-dividend stock.