The Effect of a Prolonged Bull Market on the Market Response to Stock Distributions

A widely cited finding from Grinblatt et al. (1984) (GMT) is that the market response to the announcement of a small stock distribution is greater than the response to a large one. However, the GMT result does not hold from the early 1980's through the end of the 1990's. We examine whether the bull market of 1982 through 2000 may have contributed to the attenuation of the GMT result. We hypothesize that the bull market affected the value and credibility of signals from management. This in turn changed the association between the pre-distribution share price and the market's response to the distribution, which altered the GMT result. The evidence is consistent with our hypothesis. More broadly, it suggests that a class of events exists for which the market responses during the prolonged bull market were materially different from the responses at other times. Stock distributions appear to be members of that class. Other events may be as well.