The Impact of Dividend Discontinuity on Share Price Behaviour in New Zealand

Abstract

This thesis examines the impact of dividend discontinuity on share price behaviour in New Zealand. Dividend discontinuity is the existing practice by which, upon the announcement of a dividend to be paid, a day is specified at whose beginning the legal entitlement to the dividend arises for the owner of the share. This day is known as ex-day. The hypothesis that the rate of return expected by the market comprises the time value of money and a risk premium is labelled the academic hypothesis whilst contrary hypotheses are labelled naive. In each of the two day periods beginning three days before, one day before and one day after ex-day, the existence of naive behaviour is statistically highly apparent in that the academic hypothesis has a low significance level whilst many naive hypotheses have high significance levels. Furthermore this apparent naive behaviour is economically very substantial in that the sample mean rate of return over this six day period, before transaction costs, is 1.5%, which compounds to 144% annually.