This paper analyzes the information content of corporate financial policies, in particular dividend changes and share repurchases, by examining their announcements effects on the behavior of informed traders. If unexpected dividend changes or share repurchases have information content, then there should be announcements effects on the extent of informed trading. I test this hypothesis by estimating the extent of informed trading before and after the dividends, tender offers and Dutch auctions announcements. I estimate the informed trading when the dividends announcements are informative [i.e. announcements contain surprises] and compares it when dividends announcements are not informative [i.e. announcements contain no surprises]. Consistent with conjecture, I find evidence of higher informed trading during the pre announcements period compared to post announcements period only when dividends announcements are informative. In contrast, there are no significant changes in informed trading during the pre and post announcements periods when dividends announcements are not informative. For tender offers and Dutch auction, I find no significant difference in informed trading before and after the announcements. Consistent with classical market microstructure theories, these findings suggests that asymmetry of information is reduced only if the announcements are informative otherwise there in no change in the information structure following announcements. Contrary to the recent findings by Amihud and Li (2006), which suggests that information content of dividends announcements is declining may explain the lower propensity to payout dividends by firms, this study finds that the information content of dividends announcements are still prevalent cross-sectionally among the announcements with surprises which is consistent with dividend signaling theories. These results also highlight that the recent trend of increased share repurchases activities by firms may not be due to the fact that firms prefer share repurchase to convey signals to market. The novelty of this paper is that, instead of looking at the announcements effects on price, I try to address the announcements effects on informed trading; this alternative view provides deeper understanding of announcements effects.
Amin, Abu S., "Corporate Financial Policies and Informed Trading" (2010). WCBT Faculty Publications. 258.