Special Dividend Announcements: Signaling or Free Cash Flow Hypothesis‘ Evidence from UK Firms

23 Pages Posted: 23 Sep 2009 Last revised: 12 Jan 2010

See all articles by Balasingham Balachandran

Balasingham Balachandran

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Manali Mahamuni

La Trobe University - Graduate School of Management

Michael J. Dempsey

TDT University; Financial Research Network (FIRN)

Date Written: October 30, 2009

Abstract

We examine the impact of special dividend announcements for UK firms over the period 1989-2007. We find that the market reacts positively to the announcement of these dividends, but that the reaction is stronger for firms with lower growth opportunities (low Tobin’s q). For lower-growth firms, we do not find any evidence that the firm is using a special dividend to signal future cash flow performance. Rather, it appears that these firms are using a special dividend to distribute cash that is surplus to its needs, consistent with agency theory. For special dividend issuing firms with higher growth opportunities (high Tobin’s q), we find evidence that such firms subsequently enjoy improved cash flow performances (for both the fiscal year-end immediately after, and the fiscal year following, the announcement date), thereby supporting a signaling hypothesis for special dividends. Overall, our findings offer support for both the free cash flow hypothesis and the signaling hypothesis. That is, managers use special dividends to signal future cash flow performance for firms with high growth opportunities, while using special dividend to reduce agency costs for firms with low growth opportunities.

Suggested Citation

Balachandran, Balasingham and Mahamuni, Manali and Dempsey, Michael J., Special Dividend Announcements: Signaling or Free Cash Flow Hypothesis‘ Evidence from UK Firms (October 30, 2009). 22nd Australasian Finance and Banking Conference 2009; Finance and Corporate Governance Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1460114 or http://dx.doi.org/10.2139/ssrn.1460114

Balasingham Balachandran

La Trobe University - School of Economics and Finance ( email )

La Trobe University
Bundoora, Vic, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Manali Mahamuni (Contact Author)

La Trobe University - Graduate School of Management ( email )

Bundoora, Vic, 3086
Australia

Michael J. Dempsey

TDT University ( email )

District 7
Ho Chi Minh City, 3001
Vietnam

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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