Dividend initiations, increases and idiosyncratic volatility

We examine three aspects of the relation between dividend initiation and increase announcements and idiosyncratic volatility. First, consistent with dividend signaling, we find that firms with higher levels of idiosyncratic volatility are associated with higher announcement abnormal returns when initiating or increasing dividends. Second, firms on average experience an ex post reduction in idiosyncratic volatility following dividend initiations that is associated with announcement and long-term abnormal returns. Finally, high idiosyncratic volatility firms are associated with stronger positive post event return drift. •Consistent with dividend signaling, dividend initiating or increasing firms with higher levels of idiosyncratic volatility are associated with higher announcement abnormal returns.•Firms on average experience an ex post reduction in idiosyncratic volatility following dividend initiations.•High idiosyncratic volatility firms are associated with stronger positive post event return drift.