Managerial Finance

Purpose – The purpose of this paper is to examine the effect of investor sentiment (ISENT) on the market reaction to dividend change announcements.

Design/methodology/approach – The author used the European Economic Sentiment Indicator data, from Directorate General for Economic and Financial Affairs, as a proxy for ISENT and focus on the market reaction to dividend change announcements, using panel data methodology.

Findings – Using data from three European markets, the results indicate that ISENT has some influence on the market reaction to dividend change announcements, for two of the three analysed markets. Globally, no evidence was found of ISENT influencing the market reaction to dividend change announcements for the Portuguese market. However, evidence was found that the positive share price reaction to dividend increases enlarges with sentiment, in the case of the UK markets, whereas the negative share price reaction to dividend decreases reduces with sentiment, in the French market.

Research limitations/implications – The author had no access to dividend forecasts, so, the findings are based on naïve dividend changes and not unexpected change dividends.

Originality/value – This paper offers some insights on the effect of ISENT on the market reaction to firms' news, a strand of finance that is scarcely developed and contributes to the analysis of European markets that are in need of research. To the best of the author's knowledge, this is the first study to analyse the effect of ISENT on the market reaction to dividend news, in the context of European markets.