What do dividend changes reveal? Theory and evidence from a unique environment

Abstract

We explore the reasons behind corporate dividend changes and factors driving those changes during 2001–2021 in Oman, as a unique environment. The implications of our paper contrast with the relevant existing literature which demonstrates a positive correlation between dividends and stock prices in Oman, in support of the signaling theory. Employing multiple methods and after controlling for the nonlinearity in the profitability process, we find virtually no evidence for the signaling theory of dividends for dividend reductions, in terms of future earnings. Furthermore, our analysis affirms the importance of current profitability in influencing the magnitude of and the propensity to change (increase or decrease) dividends in listed Omani firms. We also find that the catering theory of dividends does not have any explanatory power on dividend changes. Further, firms’ life-cycle status and real investments have been found to significantly affect the decision to change dividends. Our results, which depart from the findings in the conventional literature, can be attributed to the distinct institutional features in Oman. Our game-theoretic model of dividend signaling/dividend catering provides some explanations.