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Core Earnings Uncertainty, Dividend Change Announcements and the Reduction of Covariance Component Risks

We present evidence of two systematic market risk implications associated with core earnings news implicit in dividend change announcements: (1) a decline in firm-market correlation intensity, consistent with reduced investor reliance on overall market movements to value shares, and (2) a downward shift in standard deviation of returns, consistent with increased core earnings information precision. Decoupling these two covariance component risk effects is important because they can offset one another at the firm level, masking unique market influences on total systematic risk. Each is influenced by the information environment in different ways and each is shown to incrementally explain returns in a manner consistent with the capital asset pricing model (CAPM).