Stock dividends: Market reactions and motivations

This dissertation proposal examines two unresolved questions about stock dividends: (1) What are the determinants of the market reaction to a stock dividend? and (2) What motivates firms to give a stock dividend instead of a cash dividend? These questions will be approached from the perspectives of residual, agency and signalling theories. Residual theory states that investments should be financed from internal capital (financial slack) by restricting cash dividends. This financing decision affects dividend policy.The first part of the paper deals with the determinants of the market reaction to stock dividends. Market reaction to a stock dividend announcement is affected by the stock dividend change and this relationship is shown to be a function of firm size. Results are consistent with the expectation that the market reaction to a stock dividend change is larger for small firms.The second part of the paper examines what motivates firms to declare a stock dividend instead of a cash dividend. Results are consistent with hypotheses that stock dividend firms are growing faster, have higher insider ownership and are smaller than cash dividend firms.