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Stock Dividends in Germany
An Empirical Analysis
Studienreihe der Stiftung Kreditwirtschaft an der Universität Hohenheim, Vol. 50
(2015)
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Abstract
Stock distributions can affect the number of outstanding shares and the equity structure of a firm. From a neoclassical perspective, neither should have any effect on market value. However, a respectable number of empirical studies disclose overwhelming evidence that stock markets have a significantly positive reaction to the announcement of stock distributions. Despite the broad consensus about the positive market reaction, the possible causes are still debated. Focusing on stock dividends, which are a special type of stock distribution, this study revisits this puzzle and provides deeper insight into the economic ramifications of changes in the equity structure.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Preface | 7 | ||
| Table of Contents | 9 | ||
| Tables | 13 | ||
| Figures | 15 | ||
| I Introduction | 17 | ||
| II Regulatory Framework | 21 | ||
| II.1 Basic Conditions | 21 | ||
| II.1.a Stock Dividends, Stock Splits and Accounting | 21 | ||
| II.1.b Bonus Shares | 25 | ||
| II.1.c Effects on the Par Value | 25 | ||
| II.2 Further Legal Implications | 28 | ||
| II.2.a Restrictions for Future Equity Issuances | 28 | ||
| II.2.b Distribution of Funds | 32 | ||
| II.3 Conclusions | 36 | ||
| III Theory and Empirical Evidence | 39 | ||
| III.1 Theoretical Considerations on Stock Distributions | 39 | ||
| III.1.a Classification of Existing Approaches | 39 | ||
| III.1.b Signaling Theory | 40 | ||
| III.1.b.1 Fundamentals of Signaling | 40 | ||
| III.1.b.2 Stock Distributions as Signals | 41 | ||
| III.1.b.2.1 Retained Earnings Hypothesis | 41 | ||
| III.1.b.2.2 Reputation of the Management | 45 | ||
| III.1.b.2.3 Neglected Firm | 46 | ||
| III.1.b.2.4 Trading Range as a Signal | 47 | ||
| III.1.c Liquidity and Further Explanations | 47 | ||
| III.1.c.1 Trading Range Hypothesis | 47 | ||
| III.1.c.2 Further Explanations | 48 | ||
| III.1.d Jensen’s Free Cash Flow Hypothesis | 49 | ||
| III.1.e Conclusions | 50 | ||
| III.2 Empirical Evidence | 50 | ||
| III.2.a Evidence from the US | 50 | ||
| III.2.a.1 Signaling Effects | 50 | ||
| III.2.a.2 Liquidity Effects | 55 | ||
| III.2.b Evidence from Germany | 56 | ||
| III.2.b.1 General Findings | 56 | ||
| III.2.b.2 Signaling Effects | 60 | ||
| III.2.b.3 Liquidity Effects | 63 | ||
| IV Data and Methodology | 65 | ||
| IV.1 Descriptive Data | 65 | ||
| IV.1.a Data Collection | 65 | ||
| IV.1.b Size of the Firms | 66 | ||
| IV.1.c Distributions of Events through Time | 66 | ||
| IV.1.d Split Ratio | 67 | ||
| IV.2 Event Study Design | 69 | ||
| IV.2.a Market Efficiency | 69 | ||
| IV.2.b Computation of Abnormal Returns | 71 | ||
| IV.2.b.1 Discrete and Continuous Returns | 71 | ||
| IV.2.b.2 Modeling Normal Returns | 73 | ||
| IV.2.c Statistical Estimation of Normal and Abnormal Returns | 77 | ||
| IV.2.d Test of Significance | 78 | ||
| IV.3 Proxy for Jensen's Free Cash Flow | 80 | ||
| V Data Analysis | 83 | ||
| V.1 Announcement Effect of Stock Dividends | 83 | ||
| V.1.a Estimation of Abnormal Returns | 83 | ||
| V.1.b Analysis of Abnormal Returns | 85 | ||
| V.1.b.1 Cumulative Abnormal Returns for the Total Sample | 85 | ||
| V.1.b.2 Diluted Events | 86 | ||
| V.1.b.3 Special Distributions | 90 | ||
| V.1.b.4 Euro Converters | 94 | ||
| V.1.b.5 Split Ratio Effects | 96 | ||
| V.1.b.6 Bonus Shares | 101 | ||
| V.1.b.7 Cash Dividends | 104 | ||
| V.1.b.8 Market Value | 108 | ||
| V.2 Test of the Free Cash Flow Hypothesis | 111 | ||
| V.2.a Cash Flow and Tobin's q | 111 | ||
| V.2.b Free Cash Flow Proxy | 117 | ||
| VI Conclusions | 125 | ||
| Appendices | 127 | ||
| References | 145 |