Abstract
This study provides evidence in support of the cash flow information (CFI) hypothesis focusing on the Japanese firms. Dividend changes indeed convey information about the firm's cash flows. Although the free cash flow hypothesis is to some degree supported by the evidence in firms' investment behavior, dividend policy is not used by Japanese firms to control the overinvestment problem. In addition, the dividend clientele effect does not appear significant around dividend announcements in Japan. Given the specific institutional features of the Japanese market, we find that investment spending is very sensitive to liquidity constraints for nonkeiretsu firms, but not so for keiretsu firms.
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