Stock Price Reactions to Announcements of Stock Dividends and Rights Issues: a Test of Liquidity and Signalling Hypotheses on the Helsinki Stock Exchange

This paper is based on the notion that announcements of stock dividends and underpriced rights issues include a signal concerning the future cash flow of the firm. In order to be credible such a signalling device must offer the market some guarantee against widespread misuse. This paper identifies such a cost on the Finnish stock market. A measure of the power of the signal derived from this restriction, proves highly significant in explaining the excess returns observed in connection to announcements of stock dividends and underpriced rights issues on the Finnish stock market. However, some support for the alternative liquidity hypothesis is found as well. Finally, the results are shown to be largely independent of the method by which supernormal returns are defined.