Dividend Initiations, Information Content and Free Cash Flow - The Impact of the 2003 Dividend Tax Cut

Abstract

We examine the operating performance subsequent to dividend initiations by comparing firms with similar pre-event operating performance and growth opportunities. We find strong (weak) evidence of information content for dividends initiated by firms subsequent (prior) to the 2003 tax cut in the U.S. We also utilize Cox-proportional hazard regressions and find support for information content in the post-tax cut period. Further, we show that abnormal operating performances are positively related to post announcement long run abnormal returns for both the pre- and post-tax periods, indicating that the information content of dividend initiations regarding future earnings is reflected in the long-term reaction.