The Declining Information Content of Dividend Announcements and the Effects of Institutional Holdings

We propose an explanation for the “disappearing dividend” phenomenon: a decline in the information content of dividend announcements, which reduces the propensity of firms to use dividends as a costly signal. A reason for a decline in the information content of dividends is the rise in holdings by institutional investors that are more sophisticated and informed. Indeed, we find a decline in <italic>CAR</italic> at dividend change announcements since the mid–1970s. Across firms, <italic>CAR</italic> is a decreasing function of institutional holdings. Institutional investors exploit their superior information and buy before dividend increases. In addition, dividends are less likely to rise in firms with high institutional holdings.