Dividends as Signaling Device and the Disappearing Dividend Puzzle
University of North Carolina at Charlotte - The Belk College of Business Administration - Department of Economics
University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law
October 14, 2013
In the paper we develop a generalization of the Baker and Wurgler (2012) signaling model where investors are loss-averse to dividend cuts. We apply our framework to study how firm's characteristics and manager's incentives affect payout policy properties. Our results are as follows.
First, we show that firms with riskier future returns are less likely to pay dividends. However, those firms that do pay, payout more. Second, firms whose managers have a higher share of stock options are less likely to pay dividends. Third, there is a clientele effect that is investors' preferences impact the dividend policy. We show that if firm's investors are less sensitive to dividend cuts then the firm is less likely to pay dividends. Furthermore, two otherwise identical firms might have dramatically different payout policy solely due to difference in investors' preferences. Finally, we relate our model's results to the disappearing dividend puzzle.
Number of Pages in PDF File: 26
Keywords: Dividends, Signaling, Disappearing Dividend Puzzle, Loss-aversion
JEL Classification: G02, G35working papers series
Date posted: March 18, 2013 ; Last revised: October 14, 2013
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