The impact of a surprise dividend increase on a stock’s performance – the analysis of companies listed on the Warsaw Stock Exchange

This article measures the reaction of marginal investors to the announcement of a surprise dividend increase. Although field research is performed on companies listed on the Warsaw Stock Exchange, the article has important theoretical implications. Valuation theory gives many clues for the interpretation of changes in dividends. At the start of the literature review, the assumption of the irrelevance of dividends (to investment decisions) is described. This assumption is the basis of up-to-date valuation procedures leading to fundamental and fair market valuation of equity (shares). This article is designed to verify whether the market value of stock is immune to the surprise announcement of a dividend increase. This study of the effect of a surprise dividend increase gives the chance to partially isolate such an event from dividend changes based on long-term expectations. The result of the research explicitly shows that a surprise dividend increase is on average welcomed by investors (an average abnormal return of 2.24% with an associated p-value of 0.001). Abnormal returns are realized by investors when there is a surprise increase in a dividend payout. The subsample of relatively high increases in a dividend payout enables investors to gain a 3.2% return on average. The results show that valuation models should be revised to take into account to the possible impact of dividend changes on investors’ behavior.