Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

Source: Michaely, Thaler & Womack (1995) · The Journal of Finance · DOI: 10.1111/j.1540-6261.1995.tb04796.x

TL;DR

After a firm omits or initiates a cash dividend, the immediate price reaction is large (bigger for omissions), and prices then continue to drift in the same direction for about a year — the post-event drift is stronger and more robust for omissions (sample 1964–1988). It's underreaction to dividend signals, not overreaction.

What anomaly it documents

Predictor: dividend initiation (positive) or omission (negative) events.

Direction: drift continues in the announcement direction; omission drift is negative and strongest.

Shape: ~1-year post-event drift; omissions > initiations.

OSAP predictor: DivOmit.

How to construct it

Sorting variable: dividend initiation/omission event indicator.

Universe: NYSE/AMEX firms, dividend events 1964–1988.

Portfolio formation: event portfolios of initiators and omitters.

Long / short: long initiators, short omitters.

Weighting: equal-weighted event study.

Rebalancing: event-time, ~12-month holding.

Evidence and replication

Period	Notes	Source
1964–1988	post-event drift, stronger and more robust for omissions	this paper
OOS (post-1995)	dividend-signal drift persists	post-publication
OSAP (DivOmit)	replicates	Chen & Zimmermann 2022

Why it might work

Underreaction to signals: dividends convey information about prospects that prices absorb slowly.

Asymmetry: bad news (omissions) is impounded more sluggishly.

Limitations and risks

Event rarity / capacity: initiations and omissions are infrequent.

Short-leg costs: omitters are often distressed and hard to short.

Benchmark sensitivity: long-run drift estimates depend on the model.

Key references

Michaely, R., Thaler, R. & Womack, K. (1995) — Price Reactions to Dividend Initiations and Omissions — JF — DOI: 10.1111/j.1540-6261.1995.tb04796.x

Provenance: verified/generated from the paper's full text.