Shareholder wealth effects of stock dividends in a unique environment

• We investigate shareholder wealth effects of stock dividends using a unique dataset.
• In Oman, many market frictions that are used to explain the stock dividend announcement effect are either absent or limited.
• We find that the market reacts to stock dividend announcements favorably in both the short and long run.
• We also find that the market tends to underreact to stock dividend announcements in the long run.
• Our findings indicate that stock dividends are used primarily to signal future operating performance.

We investigate shareholder wealth effects of stock dividends using a unique dataset from Oman in which many market frictions that are used to explain the stock dividend announcement effect are either absent or limited. We find a positive stock market reaction to stock dividend distributions. We also find that firms that distribute stock dividends experience favorable changes in operating performance during the seven-year period around the stock dividend distribution. Our results suggest that stock dividends are used primarily to signal future operating performance and to a lesser extent to reduce stock prices to an optimal trading range.