The intraday speed of stock price adjustment to major dividend changes: Bid-ask bounce and order flow imbalances

This paper examines the intraday stock price reaction to substantial shifts in dividend policy, The results indicate the price reaction to be slower than that previously found by Patell and Wolfson (1984) and closer to that found with earnings announcements by Woodruff and Senchack (1988). Possible order flow imbalances are examined by looking at the proximity of transaction prices to contemporaneous bid and ask quotes. While order flow imbalances are evident for bad news announcements, this is not the case for the dividend increase sample. This is interpreted as evidence that the price reaction to major dividend increases are in general anticipated. Fifteen minute holding period returns are computed to measure the movement of equilibrium prices during the announcement period. Results show a rapid adjustment of prices to positive announcements with adjustment to negative announcements taking up to 75 minutes. Finally, fifteen minute lagged bid-ask returns are calculated to determine whether an investor could respond to the announcement and earn positive returns. These results are found to be dependent on the transaction cost assumptions being made.