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Huei-Hwa Lai

Department of Finance

National Yunlin University of Science and Technology, Taiwan R.O.C.

 

Szu-Hsien Lin*

Department of Finance

TransWorld University, Taiwan R.O.C.

*Corresponding Author: This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Ai-Chi Hsu

Department of Finance

National Yunlin University of Science and Technology, Taiwan R.O.C.

Abstract

In this paper, we investigate the effects of dividend policy in determining price momentum. Our evidence shows that trading strategies based on buying dividend-paying (dividend increasers, dividend cutters or dividend maintainers) stocks combined with the winner and loser momentum strategy generate positive and significant profits that are substantially higher than those from the traditional winner and loser momentum strategy. The buying-winner and selling-loser portfolios in Taiwan do not exhibit momentum profits, but exhibit contrarian profits for holding longer periods. In addition, we show that dividend policy has trading effects in determining price momentum in mid-term holding period (more than 6 months). If combined with higher formation period returns (top 50 winners), the momentum profits of dividend increasers are higher than those of dividend maintainers. Finally, investors reward companies when they have a change in dividend policy rather than just maintain their dividend levels.

Keywords: Economics, Finance, Dividend Policy, Price Momentum, Price Contrarian, Behavioral Finance

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