Download This PaperSignaling Safety
Chicago Booth Research Paper 17-30
European Corporate Governance Institute – Finance Working Paper No. 653/2020
110 Pages Posted: 4 Nov 2017 Last revised: 26 Feb 2020
There are 5 versions of this paper
Signaling Safety
The Information Content of Dividends: Safer Profits, Not Higher Profits
The Information Content of Dividends: Safer Profits, Not Higher Profits
Signaling Safety
Date Written: February 1, 2020
Abstract
Contrary to signaling models' central predictions, changes in the level of cash flows do not empirically follow changes in dividends. We use the Campbell (1991) decomposition to construct cash-flow and discount-rate news from returns and find the following: (1) Both dividend changes and repurchase announcements signal changes in cash-flow volatility (in opposite direction); (2) larger cash-flow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-flow news, nor total stock return volatility change following dividend changes. We conclude cash-flow news—and not discount-rate news—drive payout policy, and payout policy conveys information about future cash-flow volatility.
Keywords: Dividends, Payout Policy, Cash-Flow Volatility, Signaling Model
JEL Classification: G35
Suggested Citation: Suggested Citation
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