The Information Content of Dividend Initiations and Firm Size: An Analysis Using Bid-Ask Spreads.

The bid-ask spread of stock prices is examined for a sample of dividend initiating firms. The average percentage and dollar bid-ask spreads increase significantly on the day preceding the "Wall Street Journal Index" announcement date, possibly reflecting, on average, the market maker's anticipatory uncertainty. The day -1 increase in spread is inversely associated with firm size, an information environment proxy, after considering the simultaneous effects of dividend yield, returns variance, dollar trading volume and share price. The average percentage spread declines significantly on day 0 from its day -1 level and remains lower, on average, over a 365 day post-announcement period than 90 day pre-announcement levels. Similar results are obtained for dollar spread averages. The post-announcement percentage spread decline suggests a resolution of uncertainty, and is positively associated with the dividend yield. Dividend initiation announcements appear to reduce informational asymmetry. Copyright 1997 by MIT Press.