Information Content Of Dividends Research Articles

Fictitious dividend cuts in the CRSP data

We compare CRSP dividend data to data from firms' financial statements in the SEC's EDGAR database. Data screens typically used in the extant literature produce a sample in which about half of the apparent reductions in dividends per share are not actually dividend cuts. Many of the fictitious cuts are due to CRSP misclassifying special dividends as regular dividends. We demonstrate that the fictitious cuts can affect point estimates and inferences in studies of the information content of dividends. We provide a simple filter that eliminates most of the fictitious cuts in our sample – remove dividend cuts from the sample that are preceded by a dividend increase in the prior quarter. This filter produces empirical results that are similar to our sample of true cuts.

Dividend Policy, Signaling Theory: A Literature Review

With imperfect market hypothesis, it is widely accepted that announcements of dividend payouts affect firm value. An explanation has been proposed with the cash flow signaling theory and the dividend information content hypothesis. This original explanation, was developed in theoretical models by Bhattacharaya (1979), John and Williams (1985) and Miller and Rock (1985). All these authors argue that since managers possess more information about the firm's cash flow than do individuals outside the firm and they have incentives to convey that information to investors in order to inform the true value of the firm. This paper aims at providing the reader with a comprehensive understanding of dividend policy by reviewing the main theories and empirical findings under this signaling hypothesis.

Do dividends announcements signal future earnings changes for Jordanian firms?

PurposeThis study aims to examine the signalling hypothesis of dividends by testing empirically the market reaction to dividends announcements. Furthermore, this study aims to examine the information content of dividends announcements with respect to future earnings changes for a sample of Jordanian industrial firms over the period 2009 to 2015.Design/methodology/approachThe authors mainly used the event study methodology to examine the market reaction to dividend release announcements. The market model is used to generate the expected returns. Also, the t-test is used to examine the significance of the mean and cumulative abnormal return. Furthermore, a simultaneous-equation model developed by Nissim and Ziv (2001) and Grullon et al. (2005), applying the two-stage least squares (2SLS), is used to examine the relationship between dividends changes and future earnings changes.FindingsThe results reveal consistency with the limited extant empirical evidence for developing markets and provide some new insights for Jordanian listed firms that support the signalling hypothesis. In applying the event study methodology, the information content of dividends shows that there is a significant positive market reaction to dividends announcements. The study’s findings also present a strong relationship between dividends announcements and profitability in the year of announcements and the subsequent year, whereas this relationship does not exist in the second year. The findings show that there is value-relevance for dividends, suggest that investors recognize the signalling purpose and discern that dividends announcements are useful in predicting favourable and unfavourable future earnings in the short run (the same year and subsequent year) and also show that managers may use dividends to signal earnings prospects in anticipation of expected future market benefits.Research limitations/implicationsThe findings of this study could have significant policy implications. The support of a signalling effect implies an existence of information symmetry, at least theoretically, between management and investors. On the other side, this study could not reflect the levels of inside ownership or the existence of signalling substitutes even though these findings could have implications for Jordan’s existing corporate governance practices and firms’ disclosure environment. The results are specific to Jordan, but they do shed light on the generality of the rival models of dividend policy. Many of the structural characteristics of the capital market in Jordan are, however, also present in other emerging markets. The results from this study may, therefore, help provide the basis for comparative research both in the region and in other emerging markets.Practical implicationsThe support of the signalling effect implies the existence of information symmetries, at least theoretically, between management and investors. These findings could have implications for Jordan’s existing corporate governance practices and firms’ disclosure environment.Originality/valueThis paper contributes to the literature by providing a workable test for the dividend signalling hypothesis, applying a simultaneous-equation model that incorporates the market reaction to dividends announcements and future earnings changes. Moreover, this paper uses a recent data set of dividends announcements in Jordan. This study provides additional insight to support the signalling hypothesis in emerging markets. Overall, current and previous studies have focused typically on investigating dividend policy in developed markets, especially the US and European markets, although there has been limited analysis of dividends changes on earnings changes for developing markets.

The Relationships between Corporate Payout Policy and Earnings Quality

This study empirically analyzes the relationships between payout policy and earnings quality by using panel data from Korea Exchange-listed firms. Proxies for earnings quality are estimated as the quality of three accruals based on the Dechow, Sloan and Sweeney (1995) model, the Kasznik (1999) ΔCFO (change in cash flow from operations) model, and the Kothari, Leone and Wasley (2005) ROA (return on assets)-performance-matched-discretionary-accrual model, respectively. The main results of this study can be summarized as follows. Dividends have significant and positive effects on earnings quality, implying that dividends are associated with higher earnings quality, confirming the hypothesis on information content of dividends. Stock repurchases also have significant and positive effects on earnings quality, implying that stock repurchases are associated with higher earnings quality. Although stock repurchases are increasingly being used as dividend-substitutes, they do not provide the same level of assurance about earnings quality as dividends. In conclusion, corporate payout policy affects earnings quality positively. More importantly, dividends are associated with higher earnings quality than stock repurchases. This study implies that earnings quality plays a significant role in payout policy choices, thus, contributing to the literature on the relationship between payout policy and earnings quality.

The Information Content of Dividends: Safer Profits, Not Higher Profits

Contrary to the central prediction of signaling models, changes in profits do not empirically follow changes in dividends. We show both theoretically and empirically that dividends signal safer, rather than higher, future profits. Using the Campbell (1991) decomposition, we are able to estimate expected cash flows from data on stock returns. Consistent with our model’s predictions, cash-flow volatility changes in the opposite direction from that of dividend changes and larger changes in volatility come with larger announcement returns. We find similar results for share repurchases. Crucially, the data supports the prediction - unique to our model - that the cost of the signal is foregone investment opportunities. We conclude that payout policy conveys information about future cash flow volatility. Our methodology can be applied more generally to overcoming empirical problems in testing theories of corporate financing.

The Information Content of Dividend Announcements: Evidence from Frontier Markets with Varying Tax Regimes

This study provides further insight into the information content of dividends by investigating stock price reaction to the announcement of cash dividends in the unique environments presented by Jamaica and Trinidad and Tobago. In the case of Jamaica, we document a positive relationship between stock prices and dividend announcements during the period when the tax rate on dividends was 25% and the capital gains tax 0%, but no relationship when the tax rate on dividends fell from 25% to 5% with the capital gains tax rate unchanged. While, in the case of Trinidad and Tobago, where there are no taxes on dividends or capital gains, we find no statistically significant stock price reaction to the announcement of dividend increases and constant dividends but a positive relationship between the announcement of dividend decreases and stock prices. The results for Jamaica are largely supportive of tax-based signaling models which argue that higher taxes on dividends relative to capital gains are a necessary condition for dividends to be informative. However, the results from Trinidad and Tobago suggest that tax differentials are an important but incomplete explanation for the information content of dividend announcements.

Do what you did four quarters ago: Trends and implications of quarterly dividends

By analyzing the inter-temporal structure of quarterly dividends, we show that as more firms announce dividend increases exactly every four quarters, dividend policy has become more persistent and more predictable. Recently, nearly 60% of all dividend increases have been announced in four-quarter cycles. Valuation, earnings stability, and size are positively related to the propensity to adopt four-quarter cycles. More importantly, we provide evidence that this structure is incorporated into market participants' expectations about future dividend announcements. These findings may provide an explanation for two phenomena described in the literature: the declining information content of dividends and the higher degree of dividend smoothing.

The Relationship Between Cumulative Abnormal Returns And Earnings: Evidence From Emerging Markets

This study examines the signaling hypothesis of dividends by testing empirically the market reaction to dividends announcements. Furthermore, this study examines the information content of dividends announcements with respect to future earnings changes for a sample of firms listed at Amman Stock Exchange (ASE) during the period 2005 to 2010. The sample consists of 183 observations and 132 observations for dividend release sample and no-dividend release sample, respectively. The Event Study Methodology (ESM) is applied to examine the market reaction to dividend release announcements. The market model is used to generate the expected returns. Also, the t-test is used to examine the significance of the mean and cumulative abnormal returns. Furthermore, a regression model is used to examine the signaling hypothesis. To test the information content of dividend changes on earnings prospects, we individually incorporate the linear model with CAR to form the model. The findings of the information content of dividends applying the ESM methodology show that there is a significant positive abnormal return on the announcement days. Also, it shows that there is an overreaction straight after the announcement day, then a correcting attempt in the post event and then it goes back to normal, which is consistent with the signaling hypothesis. For the no-dividend release sample, the results show no significant abnormal return on and around the announcement days which is again consistent with the signaling hypothesis. Our results are consistent with AlShattarat et al . (2012) suggestions that there could be value relevance for dividends rather than dividends' change. Also, the findings present a strong relationship between dividends announcements and the profitability mainly in the year of announcements and the subsequent year, whereas this relationship does not exist in the second year of announcements. The findings of this study could have significant policy implications for Jordan's existing corporate governance practices and firms' disclosure environment. The results are specific to Jordan, but they do shed light on the generality of the rival models of dividend policy.

The Investment Performance of Common Stocks in Nigeria

From the mid-1990s, the Nigerian Stock Exchange (NSE) has witnessed remarkable growth mainly due to privatization, new minimum capital requirements, improvements in market infrastructure, amongst a host of other factors. The vast potential of the nation’s secondary market is clearly indicated in its high rating by the International Finance Corporation (IFC) and Standard & Poors with respect to investment returns in dollar terms. Despite the growth in market capitalization, it is noted that when measured as a percentage of the Gross Domestic Product (GDP), it is still quite low. The investment performance of capital market securities should enhance the contribution of the capital market to economic development. This study investigates the investment performance of common stocks in Nigeria. In particular, this study examines the empirical conformity of some finance theories in Nigeria since most of such evidence are based on developed markets and evidence on emerging markets like Nigeria remains scanty. Secondary data, obtained from official sources, were utilized. Employing correlation and regression analyses, this study confirms the Modigliani-Miller (MM) capital structure irrelevance theorem, information content of dividends’ hypothesis, stock returns-systematic factors relation, and inflation-hedging capacity of common stocks. However, the Capital Asset Pricing Model (CAPM) and Price Earnings (P/E) Ratio- Growth relation lack strong empirical support. The implications of these findings are discussed. For instance, the “irrelevance result” and the “information content result” imply that chief finance officers should devote more effort on investment opportunities rather than seeking for opportunistic financing, and follow liberal dividend distribution policy to satisfy investors’ preference for regular income and resolve perceived uncertainty in the macroeconomy. Common stocks are effective hedgers against expected inflation but poor hedgers against unanticipated inflation which is the more significant component of inflation in Nigeria.

The Information Content of Dividends: Safer Profits, Not Higher Profits

The Information Content of Dividends: Safer Profits, Not Higher Profits

The Information Content of Dividends: Safer Profits, Not Higher Profits

The Information Content of Dividends: Safer Profits, Not Higher Profits

Dividends and earnings quality: Evidence from China

This paper investigates the association between dividend payouts and earnings quality for Chinese listed firms. The results show that dividend payouts are associated with more persistent earnings, higher accrual quality, and greater earnings informativeness, confirming the hypothesis on information content of dividends for Chinese firms. Further analyses show that the relationship between dividends and earnings could change with factors influencing the incentives to pay dividends. We find that the positive impact of dividend payouts on earnings quality is reduced for firms conducting equity refinancing. We also find evidence that the state ownership can reduce the information-conveying role of dividends.

New evidence on stock market reaction to dividend announcements in India

We revisit the information content of dividend announcements in India from 2012 to 2014 in a unique market setting which involves the introduction of Company’s Act 2013. We find that announcement of increase in dividend lead to increase in stock prices, while the dividend decrease announcements are associated with decrease in stock prices. Firms that announce no change in dividends, experience insignificant negative returns around the event date. Our results contradict the tax-signaling model, which argues that higher taxes on dividends than capital gains are necessary for dividend announcements to be informative. The abnormal returns increase post the introduction of Company’s Act 2013. The results of the firm-specific panel regressions indicate that the information content of dividends has a non-linear relation with the founder ownership consistent with the monitoring and rent extraction hypotheses.

Signaling, corporate governance, and the equilibrium dividend policy

Abstract The well-documented information content of dividends is contingent on the firm's corporate governance. Using cross-listing events, we find that firms reach a new equilibrium dividend policy after a shift in the level of shareholder protection and the direction of the dividend adjustment depends on the pre-cross-listing locus of control. Exchange-traded cross-listings can afford to decrease dividend payouts as they substitute dividends with better corporate governance. However, dividend distributions and the likelihood to pay dividends increase when cross-listings are controlled by insiders, supporting the signaling hypothesis. The cross-listing level and ownership structure convey useful information regarding future shifts in dividend payouts.

Information content of dividends: a case of an emerging financial market

Purpose– The purpose of this paper is to examine the signaling and free cash flow hypotheses of dividends in the context of an emerging financial market.Design/methodology/approach– The authors use fundamental financial information of Chinese companies listed in the Shenzhen and Shanghai stock exchanges. They examine the impact of cash dividend payments on future profitability of individual firms with and without controlling for non-linearity in their earnings to test the signaling hypothesis. They also determine the characteristics of dividend paying firms to examine the free cash flow hypothesis.Findings– It was found that while dividend increases by publicly listed Chinese firms are followed by increases in earnings in two subsequent years, such relationship does not exist in the case of dividend decreases. However, under the assumption of non-linearity of earnings, it was found that neither dividend increases nor dividend decreases convey any valuable information about future changes in earnings of Chinese firms. Further, it was found that firms with high cash holdings, large profitability and high managerial efficiency are likely to pay dividends. The authors therefore conclude that announcements of cash dividend payments do not signal future performance but indicate good governance practices of publicly traded firms in China.Originality/value– This evidence is critical for potential foreign investors in their portfolio investment decisions and for regulators in determining an efficient measure of corporate disclosure in China.

Dividend Payouts and Information Shocks

ABSTRACTWe examine changes in firms’ dividend payouts following an exogenous shock to the information asymmetry problem between managers and investors. Agency theories predict a decrease in dividend payments to the extent that improved public information lowers managers’ need to convey their commitment to avoid overinvestment via costly dividend payouts. Conversely, dividends could increase if minority investors are in a better position to extract cash dividends. We test these predictions by analyzing the dividend payment behavior of a global sample of firms around the mandatory adoption of IFRS and the initial enforcement of new insider trading laws. Both events serve as proxies for a general improvement of the information environment and, hence, the corporate governance structure in the economy. We find that, following the two events, firms are less likely to pay (increase) dividends, but more likely to cut (stop) such payments. The changes occur around the time of the informational shock, and only in countries and for firms subject to the regulatory change. They are more pronounced when the inherent agency issues or the informational shocks are stronger. We further find that the information content of dividends decreases after the events. The results highlight the importance of the agency costs of free cash flows (and changes therein) for shaping firms’ payout policies.

Dividend Payouts and Information Shocks

We examine changes in firms’ dividend payouts following an exogenous shock to the information asymmetry problem between managers and investors. Agency theories predict a decrease in dividend payments to the extent that improved public information lowers managers’ need to convey their commitment to avoid overinvestment via costly dividend payouts. Conversely, dividends could increase if minority investors are in a better position to extract cash dividends. We test these predictions by analyzing the dividend payment behavior of a global sample of firms around the mandatory adoption of IFRS and the initial enforcement of new insider trading laws. Both events serve as proxies for a general improvement of the information environment and hence, the corporate governance structure in the economy. We find that following the two events firms are less likely to pay (increase) dividends, but more likely to cut (stop) such payments. The changes occur around the time of the informational shock, and only in countries and for firms subject to the regulatory change. They are more pronounced when the inherent agency issues or the informational shocks are stronger. We further find that the information content of dividends decreases after the events. The results highlight the importance of the agency costs of free cash flows (and changes therein) for shaping firms’ payout policies.

The New Conservatism: Structure and Information Content of Quarterly Dividends

By analyzing the inter-temporal structure of quarterly dividends, we show that as more firms announce dividend increases exactly every four quarters, dividend policy has become more persistent and more predictable. Recently, nearly 60% of all dividend increases have been announced in four-quarter cycles. Valuation, earnings stability, and size are positively related to the propensity to adopt four-quarter cycles. More importantly, we provide evidence that this structure is incorporated into market participants’ expectations about future dividend announcements. These findings may provide an explanation for two phenomena described in the literature: the declining information content of dividends and the higher degree of dividend smoothing.

A Note on the Information Content of Corporate Dividend Policy

This note discusses the significance of the information content of dividends, which is reflected through the market price reactions to a firm’s dividend decisions. Informational asymmetries are the main reason for signaling whereby firm managers are likely to have better information than external participants, implying that their financial decisions will tend to convey the firm’s future prospects to the market. An efficient signaling equilibrium is that optimal combination of signaling costs and agency costs that minimizes any dissipative costs. An important consideration is the preference of the investor for dividend income versus capital gains due to the higher tax differential in the case of dividends.

THE FACTORS THAT AFFECT THE DIVIDEND POLICY OF THE GREEK LISTED FIRMS PRIOR TO THE ECONOMIC CRISIS: A COMPARISON TO NYSE, NASDAQ, NORWEGIAN AND U.K. FIRMS”

This study presents, analyzes and compares the factors affecting the dividend policy of the Greek listed firms, prior to the Greek economic crises, to NYSE, NASDAQ, Norwegian and U.K. firms. Our empirical investigation has a dual objective, to record the dividend policy of the Greek firms and to compare their dividend choices to other, more financially mature, markets. We sent to all Athens Exchange listed firms a detailed questionnaire concerning their dividend choices. Our findings proved to be very interesting since the average listed Greek firm shares the same opinion with the average firm of the compared studies in the following areas: Price affection, risk bearing, past dividends’ pattern and agency costs. Some of our findings proved to be quite close with some of the results of the compared studies in the following subjects: The sector of the company, the target payout ratio, the financing ability and the information content of dividends. Finally, some of our findings are in contradiction to some of the results of the previous studies, these are: The impact of taxation on dividends and the legislation framework.