Dividend Initiations and Long-Run IPO Performance
Posted: 5 Feb 2012
Date Written: August 25, 2011
Dividend initiations are an economically significant event that has important implications for a firm’s future financial capacity. Given the market’s expectation of a consistent payout, managers of IPO firms must approach the initial dividend decision cautiously. We compare the long-run performance of IPO firms that initiated a dividend with that of similarly matched non-payers, and find robust results that firms which initiated a dividend perform significantly better up to five years after the initiation date. Further tests show that the post-initiation firm performance is explained mostly by dividend theory of signalling rather than free cash flow.
Keywords: dividend initiation, free cash flows, IPOs, long-run performance, signaling
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