CFA Practice Question

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CFA Practice Question

Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect efficient.
A. no abnormal price change before or after the announcement
B. an abnormal price increase after the announcement
C. cannot tell without additional information

User Contributed Comments 18

User Comment
MikeBarlettano an abnormal dividend would therefore decrease the value of the security much like the security price decrease by the amount of the dividend on the ex-dividend date, therefore, c is the fundamentally correct answer
andrewsutton Also indicates a lack of confidence in the firm's ability to make decent returns on retained earnings.
chunye When MSFT announced the $3 special dividend, the stock went up.
armanaziz The most significant reason should be deviation from a stable dividend policy - which causes inconvenience to invesors.
cheekywinky The increase in cash dividend payout could have been a result of increased earnings or reduced investment opportunities, which give conflicting answers, so the best answer should probably be D.
wollogo Following the announcement the price would go up, the price would decrease after the ex-date not the announcement date.
ehc0791 Usually going up on the dividend surprise, on ex-div date, the price would be adjusted down.
tiptop I agree with the answer. An increase in dividend would most likely increase the price on the announcement date. However, what would happen after we would need to know about future growth rate.
thanks I agree with ehc0791... the dividend surprise would be a signaling sign from the firm, which means a brighter future.. have to be careful with wording.. this is an announcement not ex-div date
steved333 INCREASE AFTER ANNOUNCEMENT, DECREASE AFTER PAYMENT
vavoev Decrease after closing of shareholder`s books
SuperKnight I think this is a bit tricky, the keyword here is "abnormal" price increase. I figured there would be a price increase, I just didn't think in an efficient market that it would be "abnormal"? I guess the "leakage" of information part solves this. So there would have to be insider trading?
Carol1 abnormal just means higher than usual because of "unexpectedly" large cash dividend. No insider trading in this case.
MylesGrenier Wouldn't it depend on the ex date of the dividend, why would someone just buying the security pay more if they are not entitled to the dividend? If ex date is before announcement the security price should drop.
chmcm Wouldn't it depend on what the firms ROE is?
CJPerugini Stock would go up when announced because you are returning more money to shareholders. Stock will go down (theoretically by the after tax distribution) once dividend is paid.
lquiroz92 bullshit, what about signaling theory?
edrei7 I'd buy more shares because I'd be receiving more dividends, hence increasing the price.
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