Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 444

The Wealth Transfer Hypothesis

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  CAR (Div Up)
  CAR (Div down)

EXCESS RETURNS ON STRAIGHT BONDS AROUND DIVIDEND CHANGES

Day ( 0 : Announcement date)

CAR

Bondholders view dividend increases as bad news. It makes the bonds much

riskier. To the extent that the dividend increase was unanticipated and was not

built into interest rate, this transfers wealth from bondholders to stockholders.