Dividend Initiations Research Articles

The Dividend Initiation Decision of Newly Public Firms: Some Evidence on Signaling with Dividends

AbstractWe track the dividend initiation (DI) decisions from a sample of 6,588 firms that went public during the period 1979–2005 and find that 873 of them initiated dividends. Our primary objective is to determine whether information signaling can explain the DI decision. We find that variables suggested by the dividend-signaling models of John and Williams (1985) and Allen, Bernardo, and Welch (2000) are significant determinants of the DI decision and the associated announcement-period stock price effect. We also find support for the residual, agency, tax, clientele, transaction costs, catering, and life-cycle explanations of dividend policy.

On the Causes of Volatility Effects of Dividend Initiations

On the Causes of Volatility Effects of Dividend Initiations

Disappearing Dividends: A Rational Explanation and Implications

This paper provides risk and information asymmetry-based explanations of the disappearing dividend puzzle first documented by Fama and French (2001). Dividends serve as signaling device and, under models of dividend signaling under information asymmetry, the cost of signaling increases with volatility of firms’ cash flows. Declining propensities to pay dividends imply that information asymmetries have become lower and/or cost of signaling has increased. We find evidence consistent with both. First, we find abnormal returns associated with dividend initiations have been declining over the years. We attribute this decline to increasing stock price informativeness: as stock prices become more informative, dividends contain lower information content, which in turn result in lower price reactions. Consistent with this, we find that firms with more informative stock prices are less likely to pay dividends. In addition, we also show that firms with higher (lower) information asymmetries are more (less) likely to pay dividends. Second, we find that firms with higher (lower) cash flow volatilities are less (more) likely to pay dividends. Our risk and information asymmetry proxies could explain a significant portion of the disappearing dividend trend.

Dividend initiations and long-run IPO performance

Dividend initiations are an economically significant event that has important implications for a firm’s future financial capacity. Given the market’s expectation of a consistent payout, managers of IPO firms must approach the initial dividend decision cautiously. We compare the long-run performance of IPO firms that initiated a dividend with that of similarly matched non-payers, and find robust results that firms which initiated a dividend perform significantly better up to five years after the initiation date. Further tests show that the post-initiation firm performance is explained mostly by dividend theory of signalling rather than free cash flow.

The Effects of Asset Growth on the Cross-Section of Hospitality Stock Returns

ABSTRACT This study aims to estimate the effects of hospitality firms' asset growth (year-on-year percentage change in total assets) to a cross-section of stock returns by exploring the univariate relations between market value equity (ME), book-to-market equity (B/ME), and beta (β) over the period of 1999–2009. By using the two-pass cross-sectional regression methodology, this paper uncovers the roles of ME, B/ME, β, and the effect of asset growth on returns in the analysis of the cross-sectional stock return behavior. The results of this study are expected to provide a broad outlook for the major segments of the hospitality industry (hotel, restaurant, and airline firms) for their strategic asset investment and disinvestment decisions. For instance, the findings of this study are believed to (1) establish fundamental grounds for asset expansion strategies (mergers and acquisitions, bank loan initiations, public equity offerings, etc.), asset contraction policies (share repurchases, spinoffs, stock splits, dividend initiations, etc.), and optimal asset allocation in their portfolio management for their shareholders and (2) demonstrate any abnormal stock returns—high and low—followed by these corporate events. Furthermore, the effects of asset growth associated with ME, B/ME, and β in cross-section stock returns analysis are evidenced by many scholars as both economically and statistically significant predictors of the cross-section of U.S. stock returns since the early 1960s. Hence, we conjecture that the results of this study should help understand whether a firm's asset growth is a robust predictor in the cross-section of stock returns for the major segments of the hospitality industry.

Exploring the Corporate Dividend Payment Behavior of the Japanese Chemicals Industry Firms

This article explores the corporate dividend payment behavior of the Japanese chemicals industry firms. According to our empirical examinations, the Japanese chemicals industry firms do not cater to investors' dividend demands when they decide both their dividend initiations and continuations. Instead of catering factor, in this industry, our empirical examinations reveal that the determinants of corporate dividend policies are value-weighted size, value- weighted dividend yields, and value-weighted nonpayers' or payers' market-to-book ratio. In addition, although our cross- sectional tests generally imply the relations between corporate dividend payments and firm earnings, on an aggregate time-series basis, dividend initiations tend to decline corporate earnings in the following year in this Japanese industry. This evidence can be interpreted as the denial of the traditional signaling hypothesis of dividend policy in the Japanese chemicals industry firms.

Dividends, maturity, and acquisitions: Evidence from a sample of bank IPOs

Post-IPO banks are far more likely to initiate dividends than nonfinancial IPO firms. Moreover, dividend initiation has a significant impact on the ultimate disposition of a newly public bank, increasing its likelihood of subsequent acquisition by around 40% and reducing the expected time until acquisition by 83%. Conditional on being acquired, dividend initiation increases the average takeover premium by about 55% of the market value of the bank in the month prior to the takeover announcement. Dividend initiating banks are also more mature, as indicated by asset growth rates, profitability, risk measures, and corporate governance measures. The initiation of the dividends and the ultimate sale of the firm may be consequences of the same underlying driver—maturity—but the dividend initiation appears to expedite the process by confirming the status of the firm and by drawing attention to the bank's readiness and willingness to be acquired. Dividend initiation thus seems to speed up and amplify the rewards to owners that may be reaped through an ultimate sale of the institution.

Dividend Initiations and Long Run IPO Performance

Dividend initiations are an economically significant event that has important implications for a firm’s future financial capacity. Given the market’s expectation of a consistent payout, managers of IPO firms must approach the initial dividend decision cautiously. We compare the long run performance of IPO firms that initiated a dividend with that of similarly-matched non-payers, and find robust results that firms which initiated a dividend perform significantly better up to five years after the initiation date. Further tests show that the post-initiation firm performance is explained mostly by dividend theory of signalling rather than free cash flow.

Dividend stability in a unique environment

Purpose – This paper aims to examine the stability of dividend policy using a unique data set.Design/methodology/approach – The paper is based on the Lintner model that is used to test the dividend smoothing behavior. The specific econometric method used for panel data is Tobit regression.Findings – The evidence shows that Omani firms adopt a policy of smoothing dividends. This stability of dividends does not support the predictions suggested by the high bank leverage, absence of taxes, and the variability of dividend payments in Oman.Research limitations/implications – This study highlights the need for further research in order to examine whether these results have any effect on dividend initiations and omissions in Oman.Practical implications – The findings of this study show that there are differences in dividend policies between the Omani companies and those in developed markets. Potential investors in the Omani market should be aware about these differences in making their investment decisions.Origi...

Overinvestment, corporate governance, and dividend initiations

Firms with low Tobin's Q and high cash flow have significantly more positive dividend initiation announcement returns than do other firms. I interpret this result as consistent with the hypothesis that reductions in the agency costs of overinvestment at firms with poor investment opportunities and ample cash flow are reflected in higher dividend initiation announcement returns. Further tests, such as examining the impact of governance metrics on initiation announcement returns following the dividend tax cut of 2003 and examining the long-run cash-retention policies of dividend-initiating firms, are consistent with this interpretation. There is also some evidence that is consistent with the cash flow signaling hypothesis, as dividend-initiating firms with low Tobin's Q and low pre-initiation cash flow experience substantial revisions in analysts' earnings forecasts and significantly positive initiation announcement returns.

A Test of the Catering Theory of Dividends: The case of the Japanese Electric Appliances Industry

We test the catering theory of dividends using data from firms in the Japanese electrical appliances industry. Our empirical investigations reveal that, in the Japanese electrical appliances industry, corporate managers do not consider catering behavior in either their dividend initiation decisions or their continuation decisions. This result is particularly important because it is different from existing evidence for the US. We also find that one of the most important determinants of dividend initiations among Japanese electrical appliances industry firms is the value-weighted dividend yield in the industry. Namely, we find that after the value-weighted dividend yield declines, Japanese firms in the industry tend to initiate dividend payments.

The impact of the dividend tax cut and managerial stock holdings on corporate dividend policy

We examine the impact of the May 2003 dividend tax cut and managerial stock holdings on corporate dividend initiation. We find that executives who hold sizable stakes in their companies become more likely to initiate dividends following this tax cut. The firms that initiate dividends after the tax cut are more profitable than firms that initiate dividends before the tax cut. The market appears to recognize the managers’ incentive change after the tax law change. Firms with higher managerial stock holdings receive lower abnormal returns from announcing dividend initiation.

Dividend Announcements and Contagion Effects: An Investigation on the Firms Listed with Dhaka Stock Exchange

Changes in dividend convey information about the earnings of the announcing firm which in turn affect the price. Security price depends on current earnings, past earnings, and future prospect of earnings. Dividend relevant theory postulates that dividend policy, dividend initiation and changes in dividend carry information about the market value of the announcing firms. Accordingly, an unexpected increase in dividends conveys positive information about the future profitability of the firm and vice versa. Firm’s management is better informed than the market about the future prospects of their firm and therefore, their action relating to any financing decision conveys information to the investors. The principal purpose of this study was to examine the intra-industry information effects of announcements of dividend initiations of the firms associated with Dhaka Stock Exchange (DSE). To test this hypothesis, we used Herfindahl Index and Tobin’s q ratio. The study found that the intra-industry effects of dividend revisions are apparent.

Payout initiation by IPO firms: The choice between dividends and share repurchases

Abstract This study evaluates the economics of the choice of form of payout initiation mechanism adopted by IPO firms. Our results suggest that IPO firms demonstrate a preference for repurchases over dividends as the specific form of payout initiation mechanism. We however, find that while the market views post-IPO payout initiations favorably, it is indifferent to the specific form of payout mechanism adopted. Further, we find that dividends and repurchases represent distinct payout mechanisms adopted by IPO firms with fundamentally different characteristics and motivation to initiate payouts during the post-IPO phase. Our results suggest that while dividend initiations are primarily driven by life cycle and catering theory considerations, signaling theory provides the more likely explanation for payout initiations through share repurchases.

Pengaruh Dividen Inisiasi dan Dividen Omisi terhadap Return Saham di Bursa Efek Indonesia

The objective of this study is to determine the effect of dividend initiations and dividend omission of stock returns in Indonesia Stock Exchange (BEI). Variables in this study consist of dividends, dividend announcements, and a significant stock return on dividend announcement reflected the presence of abnormal return during the event period. This study employs the company's shares listed on Indonesia Stock Exchange and are actively traded. Samples used as many as 50 companies, where 37 companies as a dividend initiation and 13 companies as a dividend omission. The sample selection was done by purposive sampling method that is research based on certain criteria. Results of analysis testing the effect of the abnormal return of dividend announcements indicate a significant influence. Announcements of dividend initiations have significant positive influence, while the announcements of dividend omissions have significant negative market reaction. That means the announcement of dividend initiations have a signal or a specific information content that causes the market to react more than normal state of the information, while the announcement of dividend omissions affect investors to remove their stock price moves down or there is a significant abnormal return. Keywords: dividend initiation, dividend omission, dividend announcement, stock return

On the financial characteristics of firms that initiated new dividends during a period of economic recession and financial market turmoil

The initiation of new dividends and increases in dividend payout ratios occur infrequently because once initiated it would be expected by most investors that the new dividends will be maintained. Dividend announcements are said to have informational content concerning the value of the firm, and financial signaling theory would lead investors to conclude that the initiation of new dividends is an indication that the firm expects increased cash flows in the future. Thus, unless the initiation is identified beforehand as a special dividend resulting from unanticipated cash inflows, it is difficult to reverse the action without having an adverse effect on the value of the firm. In periods of economic recession and financial turmoil most firms conserve cash and the initiation of new dividends or increases in the dividend payout ratio in such periods are extraordinary and noteworthy. The purpose of this study is to provide a financial analysis of those firms described by Value Line as having initiated or increased the dividend payout ratio in the most recent period of economic recession and financial market turmoil. Specifically, the analysis will test for significant differences in the financial profiles of those firms that initiated new dividends in such a period, and companies selected at random but from the same industries. A unique financial profile is established for the dividend initiating firms, and it is suggested that the profile may be used to identify firms that will initiate new dividends in future periods of economic downturn. As in previous studies of this nature Multiple Discriminant Analysis is used.

Cross‐sectional differences in the profits, returns and risk of firms initiating dividends

Purpose– The purpose of this paper is to examine cross‐sectional differences in the profits, returns and risk of high‐ and low‐market‐to‐book ratios (M/B) stocks before and after the initiation of regular cash dividend payments. Design/methodology/approach– This study uses parametric and non‐parametric statistics and ordinary least squares regression to test for differences in the profits, returns and risk of high‐ and low‐M/B stocks before and after dividend initiation. Findings– Low‐M/B stocks display the most positive price reaction to dividend initiation announcements. High‐M/B firms have larger profits, cash levels and capital expenditure before and at the time of dividend initiation, but more closely resemble the low‐M/B firms in terms of these characteristics within three years following dividend initiation. Excess returns earned by low‐M/B firms are related to decreases in systematic risk, while the returns of high‐M/B firms are related to their higher profitability. Research limitations/implications– Averaging results from 1965‐2000 does not account for possible changes in the information content of dividend initiations over time (as evidenced by steadily declining dividend yields over this period). Practical implications– The findings are consistent with the idea that firms begin paying dividends as they are maturing into a slower growth period, and do not support the idea that dividend initiation signals faster future earnings growth. Originality/value– The analysis adds to the body of knowledge by explicitly conditioning the expectations from various dividend theories based upon individual firms’ growth phase as reflected in their M/B ratios, and suggests that signaling, agency and risk explanations for dividends must be considered jointly with a firm's growth prospects when studying dividend events.

The impact of dividend initiations on Greek listed firms’ wealth and volatility across information environments

PurposeThe purpose of this paper is to investigate the impact of dividend initiations on shareholders’ wealth using a sample of 38 Greek listed firms.Design/methodology/approachThe event study methodology of Brown and Warner was employed to examine the share price reaction to initial dividend announcements across different information environments.FindingsResults show that dividend initiations bring about significant positive abnormal returns in the announcement period. The price response to dividend initiations is inversely associated with the information environment. Finally, the volatility of stock returns is higher in the low information environment group of firms than in the high information environment group of firms.Research limitations/implicationsThe observations are not many, although the whole population is included, since there are no data available prior to 2000.Practical implicationsThese findings are useful to researchers, practitioners and investors who have an interest in firms listed on the Athens Stock Exchange (ASE) for their proper strategic decision making.Originality/valueFor the first time the stock price behaviour of firms listed on the ASE around dividend initiation announcement dates is examined.

On the Dividend Initiation Decisions of Newly Public Firms

In this article, we report results on the determinants of: (i) the decision to initiate dividends, (ii) the level of dividends at initiation, and (iii) the timing of the dividend-initiation decision. In order to compare dividend-initiating firms with non-dividend-initiating firms, we track the dividend payment behavior of a sample of 5,875 firms that went public during the period 1979-1998. We consider determinants suggested by the major theories of dividends, namely, residual, tax, transactions costs, clientele, agency, signaling, and catering. Our analysis indicates that most of these theories, in different degrees, explain various aspects of the dividend initiation decision. Notably, we find support for the assumptions and predictions of the John and Williams (1985) and Allen, Bernardo, and Welch (2000) dividend signaling models.

Seeking Safety in Bad Times: Dividends and Risk Perception

In this paper, we test whether varying investor desire for safety affects valuations and dividend payout policies in the time series. Specifically, we find that the market reactions to dividend initiations and dividend increases are higher, ceteris paribus, in times when investors are more likely to seek safety. In addition, dividend initiations and increases are higher and dividend-paying stocks have higher valuations relative to non-paying stocks during such times. Collectively, these findings suggest that investor desire for safety has an incremental and meaningful impact on valuations and payout policies.