Transaction Costs And The Information Content Of Dividend Cuts

Abstract

This paper models security price reaction to dividend cut announcements in the presence of informed traders and transaction costs. A transaction costs barrier prevents the attainment of a full information equilibrium price prior to the announcement of the cut. An empirical study of transaction costs and price reaction for both common stock and call options indicates that transaction costs may constitute a significant portion of security price reactions to cut announcements. Interestingly, the results of this interpretation allow for the simultaneous presence of dividend signaling and an informed subset of investors.