Question

An academic study of dividend ommissions found that:

a. on the day before, and the day of, the dividend ommission announcement, cumulative abnormals returns move downward.

b. cumulative abnormal returns usually are flat on the announcement date because a dividend ommission implies more cash is retained in the firm (so stock price does not drop).

c. stock returns are significantly positive when a dividend omission announcement occurs.

d. stock price reacts slowly to a dividend ommission. Prices tend to trend downward over the subsequent 10 trading days.

e. a dividend ommission generally has no effect on cumulative abnormal returns.

Answer 1

Dividend omission is a bad sign and stock price reacted badly and very fast to the dividend omission thus the correct answer is option a) on the day before, and the day of, the dividend ommission announcement, cumulative abnormals returns move downward.

Other options are incorrect because they are talking about no or positive impact of dividend on stock return except option d but that is also incorrect because stock price decline rapidly rather than slowly.