The Effective Value Enhancement – The Impact of a Surprise Dividend Increase on Stock's Performance

This article measures the reaction of marginal investors to announcement of surprise dividend increase. However, the field research is performed on companies listed on Warsaw Stock Exchange, the article has strong theoretical implication. The valuation theory gives many clues for interpretation of dividend changes. At the start of literature review, the dividend irrelevance (to investment decision) assumption is met. This assumption holds up-to-date valuation procedures leading to fundamental and fair market valuation of equity (shares). This article is designed to verify whether the market value of stock is immune to surprise dividend announcement. The surprise dividend effect study gives the chance to partially isolate this event from dividend changes based on long-term expectations.The result of the research explicitly shows that the surprise dividend increase is on average welcomed by the investors (2,24% average abnormal return at the significance level of 0,1%). The abnormal returns are realized by investors increases with the increase in surprise dividend payout. The subsample of relatively high dividend payout enables investors to gain 3,2% return. The results show that valuation models should be revised with respect to the possible impact of investors’ reaction to dividend changes.This paper is under editorial process for Operation Research and Decisions.