FIN 938 Investments Seminar
CP4 – Event Study: Daily Stock Returns around Dividend Pay Dates
Analyze the data provided in the following library on my CRMDA account:
libname CP3
'R:\users\pkoch\PK_Space\FIN 938_computer problems\CP4_Event
Study_dividend pay dates';
This dataset contains the following variables:
Permno, ticker, date, a, relday, quarter, DRIP,
ar, div_yield, rdiv_yield, Lpct_inst, normal_size, normal_spread, and
normal_log_hilo.
This dataset contains daily abnormal returns (ARs) for all NYSE, AMEX, and NASDAQ
common stocks from CRSP during the period, January 1996 through December 2009. These
abnormal returns are computed by subtracting a daily benchmark return for every firm, based on
the firm’s size and book-to-market ratio, from the daily CRSP raw return for every stock.
Benchmark portfolio assignments based on firm size and book-to-market ratio are taken from
Ken French’s website. Benchmark portfolio returns are based on the work of Daniel, Grinblatt,
Titman and Wermers (DGTW, 1997) and Wermers (2003). These data are obtained from Russ
Wermers’s website.
We obtain the pay dates of all quarterly cash dividend distributions from CRSP (distcd = 1200 1499), for all ordinary common shares traded on the NYSE, AMEX, and NASDAQ (CRSP share
code is 10 or 11). If a pay date is on a weekend, we recognize that the dividend payment will
occur on the next business day. We keep all quarterly dividend events for which: (a) the number
of days between the ex-dividend day and the pay date is at least 10 and no more than 45; (b) the
number of days between the ex-dividend day and the record date is at least 2 and no more than 7;
and (c) there are at least 20 days between a firm’s consecutive pay dates. These screens help to
ensure that we ignore events with coding errors.
The variable, relday, indexes the 21-day event window covering days, (-10,+10), around the
dividend pay date for all dividend-paying U.S. firms over the period, 1996 - 2009. If relday = 0,
this is the date that cash dividends are paid.
Explanatory variables:
1) DRIP = 1, if the firm has a company-sponsored dividend reinvestment plan, or 0 otherwise.
The list of DRIP firms is available once per year for the years, 1996 - 2012, from American
Association of Individual Investors (AAII);
2) Size = the firm’s daily market capitalization averaged over days -10 through -6, where daily
market capitalization is taken from CRSP;
3) Div_Yield = firm’s dividend yield, computed as the cash dividend amount divided by the
firm’s stock price on day -10, where the dividend amount is taken from CRSP;
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4) LPct_INST = percent of shares outstanding owned by institutional investors for the
previous quarter, taken from Thompson’s 13F filings;
5) Normal_Spread = daily percentage closing bid-ask spread, as a percent of the daily closing
price, averaged over days -10 through -6, taken from CRSP.
6) Normal_Log_HiLo = intraday stock return volatility measured as the natural log of the ratio
of the daily high and low prices, averaged over days -10 through -6, taken from CRSP;
It is important to note that all explanatory variables are known at least one week prior to the
dividend pay date. The results presented in this paper are therefore allow trading strategies that
can actually be implemented.
Your Assignment:
Conduct an event study that computes the mean Abnormal Returns (ARs) and Cumulative
Abnormal Returns (CARs) for every day over this 21-day window covering days (-10,+10).
These mean ARs and CARs should be computed in 2 stages: (i) the cross-sectional mean across
all stocks in every portfolio during a given quarter, (ii) the time series mean of cross-sectional
means across all quarters. Plot these mean ARs and CARs across this 21-day window, along
with the 95% confidence intervals for both time series (i.e., the mean ARs and the mean CARs).
Present this plot in a different Figure for the following subsamples of stocks:
Portfolio 1: All dividend-paying stocks every quarter (A: with DRIPs, and B: without DRIPs).
Portfolio 2: i. the top 40% of all dividend-paying stocks every quarter by div_yield.
Portfolio 3: i. the top 40% of all dividend-paying stocks every quarter by div_yield;
and ii. the bottom 40% of all dividend-paying stocks by Lpct_INST.
Portfolio 4: i. the top 40% of all dividend-paying stocks every quarter by div_yield;
and ii. the bottom 40% of all dividend-paying stocks by Lpct_INST;
and iii. the top 40% of all dividend-paying stocks by normal_spread.
Portfolio 5:
and
and
and
i.
ii.
iii.
iv.
the top 40% of all dividend-paying stocks every quarter by div_yield;
the bottom 40% of all dividend-paying stocks by Lpct_INST;
the top 40% of all dividend-paying stocks by normal_spread;
the top 40% of all dividend-paying stocks by normal_log_hilo.
These portfolios should be based on independent sorts by all variables, each quarter.
I want 2 plots for each portfolio (1-5) – one for the subset of stocks in each portfolio with DRIPs,
and one for the remaining subset of stocks in each portfolio without DRIPs. For example, let
Figure 1A be the subset of stocks in Portfolio 1 with DRIPs, and let Figure 1B be the subset of
stocks in Portfolio 1 without DRIPs. Put all plots Figures 1A-5A and 1B-5B on one page.
On the second page, present and briefly describe the results from these plots of the ARs and
CARs in these figures. Can you explain these results in light of economic theory?
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