Dividend Signaling Research Articles

Capital change and stability when dividends convey signals

Abstract As shown in the previous literature, a change in the dividend-payout ratio can signal a change in the expected net-revenue. It can also affect capital expansion via its effect on retention. Optimal control theory is used to compute equity maximizing capital-expansion rules when dividends signal revenues. The conditions under which the signaling function can both (1) convey correct signals as to future revenue, and (2) lead to a stable equilibrium, are derived. As in Miller and Rock (1985) , this stable equilibrium, which is more properly derived here in continuous time, violates the classical equality of internal rate of return with the cost of capital, and the difference is shown to be calculable. Practical time paths for dividends and capital are suggested for various signaling regimes. In addition, strong implications for the direction of empirical signaling research are suggested.

Dividend initiations, increases and idiosyncratic volatility

We examine three aspects of the relation between dividend initiation and increase announcements and idiosyncratic volatility. First, consistent with dividend signaling, we find that firms with higher levels of idiosyncratic volatility are associated with higher announcement abnormal returns when initiating or increasing dividends. Second, firms on average experience an ex post reduction in idiosyncratic volatility following dividend initiations that is associated with announcement and long-term abnormal returns. Finally, high idiosyncratic volatility firms are associated with stronger positive post event return drift.

Information content of unexpected dividends under a semi-mandatory dividend policy: An empirical study of China

We examine the information content of unexpected dividend changes under China’s unique semi-mandatory dividend policy, which requires firms to pay a minimum amount of cash dividends before they can undertake seasoned equity offerings (SEO). The cumulative abnormal returns (CARs) are significantly positive in response to unexpected dividend increase for non-SEO firms, but they are not significantly different from zero for SEO firms. For non-SEO firms, there is a significant positive relation between future earnings and unexpected dividend increases, but the relation is not significant for SEO firms. However, when considering additional refinancing costs for SEO firms caused by the mandatory dividend policy, higher dividend payments are associated with lower future earnings. Overall, our findings are consistent with both the dividend signaling theory and the negative effects of SEOs on a firm’s value.

Capital Market Response to the Change in the Dividend Policy: The Case of Slovenian Stock Market

<p>The three basic dividend policy theories have a completely different approach to describing the influence of dividends payment on stock price, and on the value of the company. Numerous studies conducted in this area have led to almost as many derived dividend policy theories, which are more or less related to the basic three. As one of them Wang, Manry & Wandler (2011) specify the dividend signalling theory, which is based particularly on the assumption of the asymmetry of information between the company management and the shareholders and in recent decades it has been studied by many authors, who mostly concluded that dividend increase has a positive stock price reaction, and vice versa, that dividend decrease results in stock price falls (as cited in Ross, 1977; Leland and Pyle, 1977; Grinblatt et al., 1984; Baker and Phillips, 1993; Rankine and Stice, 1997; Bechmann and Raaballe, 2007). For the purposes of our analysis we adopted the methodology of foreign researches and checked the existence of the dividend signalling theory in the Slovenian stock market. The Slovenian stock market is one of developing markets, and is particularly specific due to its small size and illiquidity. Our research resulted in no statistically significant stock price increases from company dividend increases, whereby we have refuted the research hypothesis and, consequently, the dividend signalling theory in the Slovenian stock market in the described period.</p>

Determinants of stock prices during dividend announcements: an evaluation of firms' variable effects in Nigeria's oil and gas sector

AbstractThe aim of this research was to analyse, statistically significant, quantitative variables that determine the share price of oil and gas sector companies listed on the Nigerian Stock exchange, during the economic slowdown period of 2009–2013, after the world financial crisis of 2008, and investigate whether the signalling hypothesis holds or not. In terms of analytical tools, multiple regression analysis is used. During dividend increase announcements, the regression coefficient determinant (R2) indicates that over 90 per cent of variations in stock prices is explained by variations in dividend announcements. This study supports the dividend signalling hypothesis (DSH) but discredits the efficient market hypothesis. During a dividend decrease, the R2 for both equations indicates that over 64 per cent of variations in stock prices is explained by variations in dividend announcements. This result also supports the DSH. The implication of this is that racketeers can capitalise on this and make unjustified returns. By so doing, both sector investors and the stock market will be short changed. As this research considers only the oil and gas sector, further studies need to be conducted that consider possibly all listed firms in the Nigerian stock market, within the same interval to further investigate if the signalling hypothesis will hold or not. But most appropriately, applicable, as a comparative study of the same sector before and after the world financial crisis of 2008 the paper seeks to find out if this phenomenon is also applicable to OPEC member states. This research is in progress.

上市公司股利政策信息效应研究

本文主要基于股利政策的信号传递理论，解释公司股利决策动机是如何在控股股东自身利益最大化与利用股利政策发送信号实现企业价值最大化之间进行选择的，从中发现我国上市公司股利政策的运行规律和机理。采用事件研究法，用股票交易的高频数据考察股利公告前后市场信息不对称的变化。在总结相关结论的基础上给出了政策建议。 Basing on dividend signaling theory, our study explains the motivation of corporate dividend payment. It explains how to choose in controlling shareholders to maximize their own interests and utilization of dividend policy to send signals to maximize the enterprise value. It studies the dividend policy running rule and mechanism of listed companies. By using event study, we choose the high-frequency data of stock trading to explore the change of market information asymmetry before and after dividend announcements. Taken together, our study provides some policy suggestions based on the results.

The Impact of Dividend Payment on Market’s Expectation after the Global Crisis

<p>This paper examines if there is any change in investors’ behavior toward dividend payout policy of the US corporations after the breakout of the global financial crisis in 2007-2008. In order to do so, dividend signaling theory is adopted as the main theme where we build econometrical models describing the influence of dividend payment on market’s expectation. Unlike most of the previous studies which use either price-dividend or dividend-earnings type tests to provide empirical evidence for the signaling theory, this paper attempts to perform a new type of test called present value of growth options (PVGO)-dividend type test. It is inspired by the recent development of real options as an investment valuation tool. This paper is in our opinion the very first to examine the implications of the signalling models in the context of the relation between dividend and PVGO using real options technique. Our result shows that in the market flooded with information like the US financial market, dividend no longer plays a significant role in delivering additional valuable information to investors. This outcome is highly inconsistent with dividend signaling theory. </p>

Dividends as Reference Points: A Behavioral Signaling Approach

We outline a dividend signaling model that features investors who are averse to dividend cuts. Managers with strong unobservable cash earnings pay high dividends but retain enough to be likely not to fall short next period. The model is consistent with a Lintner partial-adjustment model, modal dividend changes of zero, stronger market reactions to dividend cuts than increases, comparatively infrequent and irregular repurchases, and a mechanism that does not depend on public destruction of value, which managers reject in surveys. New tests involve stronger reactions to changes from longer-maintained dividend levels and reference point currencies of American Depository Receipt dividends. Received July 16, 2012; accepted September 15, 2015 by Editor David Hirshleifer.

Bank dividends and signaling to information-sensitive depositors

This study investigates whether banks use dividends to signal asset quality and liquidity to their debtholders. We exploit an exogenous shock to the asset opaqueness and perception of risks of Brazilian banks caused by the global financial turmoil of 2008. Our empirical identification takes advantage of the cross-sectional heterogeneity of types of depositors in Brazilian banks and the existence of several owner-managed banks (for which shareholder-targeted signaling is implausible) to identify that information-sensitive depositors (institutional investors) are targets of dividend signaling by banks. These costly signaling efforts are particularly strong during financial crises when asset opaqueness, informational asymmetry and depositors’ concerns regarding bank liquidity are exacerbated. From a policy perspective, our results favor the imposition of limits on bank dividends during financial crises, because the banks’ need to signal their financial health through dividends during crises intensifies the pro-cyclical effects of bank capital on lending.

Dividend Policy Responses to Deregulation in the Electric Utility Industry

This paper investigates changes in electric utilities’ dividend policies following the onset of deregulation. Consistent with the theory of dividend clienteles, we find that utilities continue to pay high dividends after the onset of deregulation. Under a regulated regime, we find no systematic pattern of associations between dividend changes and abnormal stock returns or future earnings changes. Post-deregulation, however, we find that, consistent with prior research on unregulated firms, dividend increases (decreases) are viewed by the market as good (bad) news. When we examine earnings following changes in dividends, we do not find evidence in favor of the dividend signaling theory.

Bank holding company dividend policy, regulatory guidance and the Great Recession

Dividend policy has long reflected a ‘puzzle’ to academic research. Are dividends irrelevant or do dividends signal future performance and/or regulatory restrictions? We evaluate the dividend policy of systemically important US bank holding companies before, during and after the Great Recession and Panic of 2008. The majority of companies sharply reduced dividends to conserve liquidity and retain capital during the crisis. Those companies that quickly and forcefully slashed dividend payout ratios are better regarded by the market than those who repeatedly reduced dividend payments by small increments. The market does not distinguish between the companies that suspend dividends relative to those that in substance suspend dividends by paying one cent per share per quarter to retain recognition within trustee ‘hold lists’ of acceptable investments. Based on price/book valuation subsequent to the crisis, the market best rewarded those companies with the highest payout ratio and the highest dividend paid relative to that provided before the crisis. Banks failing regulatory stress tests were unable to pay sizable dividends and suffered in terms of valuation. Although dividends are important, return on equity and price/earnings multiples are more important drivers of value because they provide the basis for dividends payments.

FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE

According the dividend signalling hypothesis, it is expected a positive relationship between dividend change announcements and the subsequent share price reactions. However, empirical results are not consensual. This study investigates whether firm-specific factors contribute to explain a negative market reaction to dividend change announcements, contributing to the scarce analysis of firm-specific factors explaining the inverse share price reaction to dividend change announcements. The study applies the panel data approach to three European markets. The results show that the market reaction to dividend change announcements is negatively associated with the firm size. We find that the negative market reaction to dividend increase announcements is associated with firms that have, on average, lower dividend changes and higher growth opportunities. Moreover, the results suggest that a high percentage of dividend negative changes, decreases the likelihood that the market reacts positively to a dividend decrease announcement. Globally, we find some evidence for the dividend signalling hypothesis.

The Impact of Dividend Omission Announcement on Market Price of Manufacturing Companies: A Study on Dhaka Stock Exchange (DSE)

The dividend policy is one of the most debated topics in the finance literature. According to the dividend signaling hypothesis, dividend change announcements trigger share returns because they convey information about firm's future prospect. This paper focuses on the empirical analysis of the dividend signaling hypothesis and investigates the announcement effect of dividend changes. The study aims to examine the stock return behavior around the dividend announcement in Dhaka Stock Exchange. The event study methodology is used for this study. The abnormal return and cumulative abnormal return are calculated with market adjusted model. The event window is 30 days. The abnormal return and cumulative abnormal return are evaluated for significance using t-test. The findings of the study reveal that the reaction of stock prices to dividend omission announcement is statistically significant. The evidence tends to support the dividend signaling hypothesis that the bad news message affects the market negatively.

Dividend Signalling And Market Efficiency In Emerging Economy: A Study of Indian Stock Market

This paper applies GARCH (p, q) model and non-parametric Run test for studying isolated events of dividend change announcements covering a period of ten years for capturing abnormal returns in the Indian Stock Market using an event window of 61 days. The results indicate that there is no signalling effect of ‘dividend increase/decrease along with financial results announcement’ event on the share price of companies. Cumulative abnormal return tendency is observed if share purchase is made prior to any of the events. It is also found that adjustment in prices after event date takes place with a substantial time lag reflecting inefficiencies in the market. Keywords: Signalling effect; market efficiency; dividend announcement; event study; emerging economy

Dividend Initiations, Increases and Idiosyncratic Volatility

We examine three aspects of the relation between dividend initiation and increase announcements and idiosyncratic volatility. First, consistent with dividend signaling, we find that firms with higher levels of idiosyncratic volatility are associated with higher announcement abnormal returns when initiating or increasing dividends. Second, high idiosyncratic volatility firms are associated with stronger positive post event return drift. Finally, firms on average experience an ex post reduction in idiosyncratic volatility following dividend initiations that is associated with announcement and long-term abnormal returns.

Stock Market Reaction to Various Dividend Announcements: Which Kind of Dividend Announcement is More Significant?

Abstract According to the dividend signalling theory, companies take advantage of their announcement of dividend payout policy to signal the market that the firm now has positive future prospects, which will result in changing stock prices. However, there has been no study to date exploring which factor is more significant to its possible dividends payout portfolio. This study focuses on the impact of various dividends payout policies, cash, stock, and even dual dividends, for 5870 Taiwanese companies in the electronics and non-electronics industries listed in the Taiwan Stock Exchange (TSE) during the period from 2000–2010. The study employs event study methodology to examine the effect of a dividend announcement on the stock price within thirty days of the announcement. The results indicate that, on the whole, stock prices will show significant upward movement after dividend announcements. The observed results also explain why firms typically distribute certain dividends in certain ways and why the market might react more positively to stock dividend announcements in emerging markets.

Pricing Under Noisy Signaling

We provide rationale, conditions, and insights for "customized" pricing in markets, that is, for equilibria where different buyers pay different prices for similar products. We use a Spence/Riley signaling model enhanced by a signaling methodology under random relations between costs and attributes, developed by Feldman (2004) and Feldman and Winer (2004). Examples include markets for new cars, retail, human capital, trades where transaction costs are negotiable, and transactions where sellers affect buyers’ costs by offering different levels of service or support for the same products and prices. These encompass a large fraction of all assets, prices, and transactions. Our results help explain the different levels of segmentation and product/service differentiation that we observe in markets and the efficiency of these equilibria. We note that we can demonstrate the results within competitive sellers’ markets. Financial markets examples include dividend, IPO, market microstructure and capital structure signaling, and share class distinctions in mutual funds.

Dividends: Relevance, rigidity, and signaling

This paper uses a dynamic partial equilibrium model to explain a puzzle of dividend smoothing. In contrast to the Modigliani–Miller theory, I show that firm value depends on payout policy. The analysis implies that firms with more stable dividend stream are more valuable. This explains why dividends are rigid over time. A volatile component of dividends is introduced to reduce the likelihood of dividend omission in bad times while keeping the same historical average dividends. I show that the empirically observed positive relation between dividends and future firm performance is a statistical artifact driven by dividend smoothing. Thus, the empirical tests of dividend signaling theory might be misspecified.

Dividends, Debt and Investment: Impact on Stock Prices—Evidence from India

Using a generalised version of Rees ( 1997 ) model, the study empirically determines the extent to which market prices are supported by corporate financial variables (dividend payout, debt levels and investment expenditure) for a set of Indian listed companies (CNX 100) over a 10 year period. The results of the study suggest that earnings distributed as dividends have a greater impact on firm value than do earnings retained within the firm confirming the signalling effect of dividend policy. The study also finds that total debt (financing decision) is a signal of value for the Indian dataset examined. The study, however, fails to provide any support for investment (capital) expenditure decisions in explaining market prices in case of Indian dataset examined. The study further segments the dataset on the basis of average ROE (return on equity) to determine the segments of the sample for which the dividend signalling is stronger. The results reveal that in case of companies exhibiting extreme return on equity (due to significant transitory component in earnings), the value impact of dividends and/or book value is greater than that of retained earnings.

Do dividends signal future earnings in the Nordic stock markets?

We study the informational content of dividends on three Nordic civil law markets, where other simultaneous but blurring motives for dividends may be weaker. Using aggregate data on real earnings per share and payout ratios, long time series from 1969 to 2010, and methodologies which address problems of endogeneity, non-stationarity and autocorrelation (including a vector error correction model approach), we find evidence on dividend signaling in Nordic markets. However, we also find heterogeneity in the relationship between dividends and earnings on markets similar in many respects, suggesting that even small variations in the institutional surroundings may be important for the results.