Payout Financing and Announcements: How the Payout Gap Relates to the Market Reaction to Dividend Initiations and Omissions

Sammanfattning

Our thesis investigates the relationship between the existence of a payout gap, as defined by Farre-Mensa et al (2025), and the price reaction and the idiosyncratic volatility observed during dividend initiation and omission announcements. Analyzing publicly listed firms in the U.S. from 2005 to 2024 utilizing linear regressions, we find that the payout gap is moderately and negatively related to the three-day CAR, based on the definition by MacKinlay (1997), for initiation announcements. For omissions, we find some evidence that suggests firms with a payout gap in the prior year experience a less negative market reaction compared to firms without. Generally, the payout gap does not appear to be significantly related to idiosyncratic volatility, computed according to Ang et al (2006), for both initiations and omissions. However, the logarithmic value of the dividend amount last paid has a moderately significant and positive impact on idiosyncratic volatility observed during omissions. We also find evidence that the abnormal trading volume is significantly related to the three-day CAR and the idiosyncratic volatility observed for initiation and omission announcements.