Disappearing Dividends: A Rational Explanation and Implications

68 Pages Posted: 13 Oct 2011

See all articles by Min Maung

Min Maung

University of Saskatchewan

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis

Date Written: August 2, 2011

Abstract

This paper provides risk and information asymmetry-based explanations of the disappearing dividend puzzle first documented by Fama and French (2001). Dividends serve as signaling device and, under models of dividend signaling under information asymmetry, the cost of signaling increases with volatility of firms’ cash flows. Declining propensities to pay dividends imply that information asymmetries have become lower and/or cost of signaling has increased. We find evidence consistent with both. First, we find abnormal returns associated with dividend initiations have been declining over the years. We attribute this decline to increasing stock price informativeness: as stock prices become more informative, dividends contain lower information content, which in turn result in lower price reactions. Consistent with this, we find that firms with more informative stock prices are less likely to pay dividends. In addition, we also show that firms with higher (lower) information asymmetries are more (less) likely to pay dividends. Second, we find that firms with higher (lower) cash flow volatilities are less (more) likely to pay dividends. Our risk and information asymmetry proxies could explain a significant portion of the disappearing dividend trend.

Keywords: dividends, infotmation asymmetry, stock price informativness, abnormal announcement returns

JEL Classification: G14, G35

Suggested Citation

Maung, Min and Mehrotra, Vikas, Disappearing Dividends: A Rational Explanation and Implications (August 2, 2011). Available at SSRN: https://ssrn.com/abstract=1904070 or http://dx.doi.org/10.2139/ssrn.1904070

Min Maung (Contact Author)

University of Saskatchewan ( email )

Edwards School of Business
Saskatoon, Saskatchewan S7N 5A7
Canada

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis ( email )

School of Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2976 (Phone)
780-492-3325 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
151
Abstract Views
646
rank
195,879
PlumX Metrics