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.