Complexity of information and trading behavior: The case of dividend increase announcements

We examine the intraday trading response of participants in the common stock market and in the preferred stock market to announcements of dividend increases on common stock. We find that participants in the preferred stock market respond more slowly to the announcement than those in the common stock...

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Bibliographic Details
Published in:Journal of economic psychology 2008-02, Vol.29 (1), p.1-18
Main Authors: Deshmukh, Sanjay, Fatemi, Ali, Fooladi, Iraj J.
Format: Article
Language:English
Subjects:
Advertising. Marketing. Consume behavior
Applied psychology
Behavioural economics
Biological and medical sciences
Common stock
Dividend increases
Dividends
Economic models
Economic psychology
Fundamental and applied biological sciences. Psychology
Heiner's model
Investment analysis
Investor behavior
Preferred stock
Psychology. Psychoanalysis. Psychiatry
Psychology. Psychophysiology
Securities markets
Stock exchange
Stock returns
Studies
Trade volume
Trading response
Uncertainty
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Summary:We examine the intraday trading response of participants in the common stock market and in the preferred stock market to announcements of dividend increases on common stock. We find that participants in the preferred stock market respond more slowly to the announcement than those in the common stock market. Our results are consistent with the implications of Heiner’s model of behavior under uncertainty, which suggest that investors who face a more complicated environment respond more slowly to new information. Participants in the preferred stock market face a more complicated environment because they have to determine the source of financing of the dividend increase, which can either increase or decrease the value of these securities. In contrast, regardless of how it is financed, a dividend increase has an unambiguous positive effect on the value of common shares. Therefore, the participants in the common stock market do not need to make the additional determination that preferred shareholders do, and, thus, need less time to analyze the information.
ISSN:0167-4870
1872-7719
DOI:10.1016/j.joep.2007.01.009