The dividend month premium, liquidity and foreign ownership: Evidence from the Nordics

Abstract

The purpose of this thesis is to examine whether companies earn abnormal returns in months of a dividend payment. While existing literature comprises of a wide range of studies in dividends and stock returns, a substantial part of the research is focused on specific events, such as the dividend announcement day or the ex-dividend day. However, most interestingly for this study, Hartzmark and Solomon (2013) find an asset-pricing anomaly in which abnormal returns produced by dividend-paying companies extend to a longer time period. They document positive abnormal returns during the interim period between a dividend announcement and an ex-day and during the entire calendar month around a dividend payment.

This paper is the first effort to extend their research outside the U.S. The motivation to do so lies in the unique nature of the U.S. market, notably high dividend payment frequency, generally low level of transaction costs, and low share of foreign ownership. Therefore, the Nordic market represents an interesting counterparty.

The two main methods I use follow those of Hartzmark and Solomon (2013). First, to calculate monthly abnormal returns in dividend months, I form stock portfolios based on dividend payments and regress these on excess market returns, small minus big (SMB), and high minus low (HML). The intercept coefficient represents the abnormal return. Second, to assess whether price pressure drives the dividend month premium effect, I calculate average daily characteristic-adjusted returns around ex-dividend days in the following manner: I adjust returns by subtracting the returns of a portfolio matched on terciles of market capitalization, book-to-market ratio, and momentum.

Consistent with Hartzmark and Solomon (2013), I find companies to earn significantly higher returns in months of a dividend payment. Abnormal returns are unlikely to be driven by risk as they survive tests relative to non-payers and dividend-paying firms in months without a dividend issuance. I argue that the effect is driven by price pressure from dividend-seeking investors cum-dividend due to three main reasons. First, I document a considerable average interim period return which cannot be explained by a news component or tax consequences. Second, I find some evidence that high interim period returns are followed by negative reversals after the dividend payment, emphasizing the increased selling pressure ex-dividend. Third, I show a robust correlation between liquidity and adjusted returns. In addition, I find evidence of foreign investors avoiding dividend payments by selling stocks in the lead-up to ex-day and buying them back afterwards.

This thesis contributes to the finance literature in several ways. It examines the dividend month premium effect in a market with widely different characteristics compared to the U.S. Moreover, it greatly increases the robustness of the relation between liquidity and returns, demonstrates how higher share of foreign ownership decreases the dividend month premium, and shows that the premium is not driven exclusively by small firms.