Abstract
This study attempts to assess the explanatory power of the wealth transfer hypothesis, agency hypothesis and signalling hypothesis when stock prices change upon announcements of dividend changes. The evidence thus far on wealth effects of dividend policy changes is mixed. While there is preponderance of work that explains the stock price reaction as a signal of future firm performance, very little empirical work has been done on other potential explanations. The main findings of the paper suggest that a potential for reduction in agency costs is the primary driver of stock prices with information signalling playing a marginal role. We do not find any support for the wealth transfer hypothesis.