Signaling or Wealth Transfer: Evidence from the Response of Corporate Bonds to Payout Changes

Abstract

Several hypotheses have been proposed to explain the abnormal returns associated with the corporate stock dividend changes, including information signaling hypothesis and wealth transfer hypothesis. Related securities not subject to the immediate capitalization changes can be useful to shed some light on the issue and will be better able to capture any risk changes in the company. Using corporate bonds, a significant decline in bond yields has been found following dividend increase and a significant increase in bond yields following dividend decrease, supporting signaling hypothesis where not strong wealth transfer effect.