Dividends and Foreign Performance Signaling

Abstract

This study uses Hines' (1996) dividend process model to test the effect of domestic versus foreign profitability shocks on firms' dividend payout policy. Investigating an international sample of 283 companies from Europe, Australia, New-Zealand, the U.S.A. and Canada, we find that increases in some foreign market earnings stimulate higher cash distributions than similar increases in domestic earnings. The disaggregation of foreign performance across country-specific markets reveals that managers are predominantly using dividends to signal foreign profit movements that have been generated in emerging markets and Asian Pacific developed markets - while they are not compelled to send signals related to positive earnings news originating from the other mature developed markets (North America and Western Europe). Our findings also confirm empirically the popular view that due to their higher variance and lower persistence, positive foreign profitability shocks coming from emerging markets are more difficult to integrate in stable dividend policies.

Keywords: Signaling, performance, dividend policy, multinational firm, disaggregation

JEL Classification: F23, M41, G14