Market Reactions to Dividend Announcements Under Different Business Cycles

In this paper, I examine the impact of business cycles on the market reaction to dividend announcements of large-cap firms in the Tel Aviv Stock Exchange. The findings show that the 2001-7 significant positive first-day dividend announcement reaction is derived from the significantly stronger market reaction during the crisis period of 2001-2. Hence, I conclude that the business cycle is a critical parameter in the investors' interpretation of dividend announcements. During busts, a dividend announcement is perceived as a strong and reliable signal about the state of the corporation, compared to times of normality.