Corporate Signaling with Dividends, Stock Repurchases, and Accounting Disclosures: An Empirical Study

Abstract

This paper examines corporate signaling practices in a framework that includes dividends, stock repurchases, and accounting disclosures. Using analysts' ratings of firms' disclosure practices as a proxy for the level of accounting disclosures, this study investigates the substitutability among these signals. Prior studies have questioned how costly signals, such as dividends and stock repurchases, coexist with presumably less costly alternatives, such as annual reports or other accounting disclosures. The signaling models in the finance literature generally assume that because of the problems of moral hazard, accounting disclosures are not viewed credibly by investors. This study presents evidence for an alternative explanation. For some firms, dividends and stock repurchases may be less costly than accounting disclosures. Prior studies model the trade-off the firm faces between the benefits of conveying favorable information to the financial markets and its need to protect proprietary information from potential competitors. Consistent with the predictions of these studies, my results indicate that “good news” firms that operate in markets with lower industry concentration ratios, and therefore lower entry barriers, are more likely to convey favorable news via dividends or stock repurchases instead of accounting disclosures. These firms appear to rely on dividend and stock repurchase signals as a means of conveying favorable news to investors without releasing specific proprietary information.