“Dividends and Option Prices ”
by Prof. Nejat Seyhun
Ross School of Business – University of Michigan
Abstract
We seek to measure the effects of dividends on option prices. Individual stock options are American type and unprotected from dividends. Option holders are expected to anticipate the dividend payments during the life of the option and price the option accordingly. Consequently, as long as dividends are anticipated, in an efficient market, dividend payments should not affect option prices. On the other hand, unexpected dividend changes should result in wealth gains and losses for option holders. In this paper we test to see if investors form proper expectations about the dividend policy and take into account both expected and unexpected changes in dividends in pricing options. Our findings indicate that unexpected dividend changes affect option prices, while expected dividend changes do not affect option prices.
