Dividend Changes, Signaling, and Stock Price Performance

Abstract:     
This paper revisits the dividend-signaling hypothesis by examining the post - announcement operating performance of German companies. We analyze a broad set of firm characteristics, like changes of earnings, levels of earnings, assets growth, capital expenditures or risk of the company. In addition, we introduce the annual stock return in the analysis to study if the signaling theory can explain the negative correlation between the dividend decision and the share price performance, as documented by Savov and Weber (2006). Our results do not provide any evidence that dividend increases convey information about the future operating performance. In the years after the announcement, dividend-increasing companies do not perform significantly better, compared to the pre-announcement period or to firms with unchanged dividends. This holds for the overall sample as well as for the subsamples formed on the basis of the past return.

Number of Pages in PDF File: 45

Keywords: Dividend, signaling, stock price performance

JEL Classification: G35

working papers series