The Effect of Dividend Initiations on Stock Returns:

This paper measures the effect of dividend initiation announcements on firms’ stock returns using a propensity score matching approach. Unlike the traditional event study methodology, propensity score matching can reduce the bias in the estimation of dividend initiation effects by controlling for the existence of confounding factors. Consistent with previous studies, the results show that dividend initiations have significantly positive effects on stock returns. More interestingly, the reaction of stock returns to dividend initiation announcements exhibits apparent heterogeneity. The overall empirical evidence presented in the paper supports a tradeoff model based on the benefits and costs of dividend payments.