The wealth effects of dividend announcements on bondholders: New evidence from the over-the-counter market

•This paper examines bond price reactions to dividend change announcements.•Most of the results are consistent with the signaling hypothesis.•Bond market reactions to dividend increases (omissions) are positive (negative).•Bond market reactions are more positive for larger dividend increases.•Bond market reactions are more positive for speculative grade bonds.

This paper investigates the announcement effect of dividend changes on bondholders using bond transaction data from the over-the-counter market. Abnormal bond returns over a three-day event window are positive surrounding dividend increase announcements and negative surrounding dividend omission announcements. The bond market reaction to the dividend increases is more positive for larger dividend increases, speculative grade bonds and the period from 2008 to 2010. Most of the results are consistent with the signaling hypothesis. Additionally, bond market reactions to dividend decreases and initiations are insignificant. The stock market reacts negatively to dividend decreases and positively to dividend initiations. The bond and stock market reactions to dividend decreases and initiations suggest that there is also a wealth transfer effect.