Signaling With Mandatory Dividends: The Case of the Greek Stock Market

Abstract

We explore the effect of dividend announcements on stock market returns in the context of an event study. Our sample consists of firms paying the minimum required dividend and firms paying above the required minimum. In Greece, tax wise, dividends are treated equally with capital gains and corporate management is controlled by major shareholders to a large extend. Controlling for managerial moral hazard and the degree of back- and frontloading of the managerial compensation scheme, our theoretical model predicts that with known assets in place and asymmetric information on reinvestment prospects, unexpected dividend increases result in negative abnormal returns. Also, the higher the expectations of investors about reinvestment prospects, the lesser the impact on the stock price when firms announce the minimum required dividend. These theoretical predictions are corroborated from our empirical findings. Announcements when minimum dividend is paid have no signaling effect providing prima facie evidence that dividends contain new information not embedded in contemporaneous earnings announcements.