Inverse market reaction to dividend changes in the european context

Abstract

This study tries to understand why the market sometimes reacts negatively/positively to dividend increases/decreases, showing an inverse market reaction to dividend change announcements; using samples from three European markets (Portuguese, French and British). The results are different across these three countries. Data from a small country, Portugal, suggests that the inverse market reaction to dividend change announcements takes place because the market does not understand the signal given by firms through dividend-change announcements. For the UK market, the results have some success in explaining the inverse signalling effects. Finally, the results suggest that in the UK investors can better predict future earnings based on dividends than in Portugal or France.