Do Firms Use Dividends to Signal Large Future Cash Flows
Year: 1999
Type: preprint
Abstract: We find that firms poised to experience large, permanent cash flow increases after four years of flat cash flow tend to boost their dividends before their cash flow jumps. These firms also have a high frequency of relatively large dividend increases prior to the cash flow shock. Investors appear to interpret the dividend changes as signals about future profitability: firms that sharply increase their dividends earn large market-adjusted stock returns in the year before their cash flow rises. This direct link between positive cash flow shocks, dividend decisions, and stock returns supports the hypothesis that dividend changes signal positive information about permanent future cash flow levels. However, our results also suggest that signaling plays a relatively minor role in corporate dividend policy.
Source: SSRN Electronic Journal
Institutions: Santa Clara University, University of Richmond
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2265834017