Date of Award


Document Type


Degree Name

Doctor of Philosophy (PhD)


The main objectives of this study were: to find out what theoretical hypothesis explains the behavior of security prices with response to dividend changes, and to test the bond market efficiency. To detect what theoretical hypothesis better predicts the behavior of security prices, the behavior of bond prices was compared to the behavior of stock prices. The comparison period mean returns method is the method of analysis which was applied to measure the abnormal performance. The research sample contained 128 events of stock splits and dividend increase announcements, 38 dividend increase announcements (following stock split announcements), and 23 dividend decrease events. These announcements were made by firms over the period June 1962 through December 1978. The Center for Research in Security Prices (CRSP) tapes were utilized to obtain stock split and dividend change announcements and common stocks daily returns. The source of bond prices was the Wall Street Journal. The samples were divided to subsamples, which was based on the size of dividend changes. Both bond and stock prices were found to respond to dividend changes. This response was more apparent when high dividend changes were considered. That is, both security prices responded significantly to high dividend changes. The reaction of both security prices to dividend changes was found to be in the same direction. The study results are in support of the informational hypothesis in opposition to the wealth redistribution hypothesis. Both stock and bond prices were found not to respond significantly to either low dividend changes nor to stock splits by firms paying no cash dividends. Finally the results show no evidence against bond market efficiency. That is because no abnormal returns were found to occur on trading days subsequent to the announcement period of dividend changes. This study has two main implications. First both bond and stockholders consider dividend changes as a signal about the firm's future prospects. Second, the gap of differences between bond and stock markets is narrower than what was thought by several researchers.