Special dividends: what do they tell investors about future performance?

Previous research documents positive short-term stock returns at the announcement of a special dividend and evidence of increased earnings at the time of the dividend. This paper examines the long-run performance of firms paying special dividends to determine whether the stock returns and earnings performance continue to improve over the long run. We find that special dividend announcing firms have unexpectedly high earnings thy year of the special dividend announcement; however these unexpected earnings decline significantly in the years following the special dividend. Special dividend paying firms also earn significant positive excess returns the year before the special dividend announcement. On average, investors cannot expect the stock and operating performance that precede a special dividend to continue following the announcement. [PUBLICATION ABSTRACT]