Dividends as Signaling Device and the Disappearing Dividend Puzzle

26 Pages Posted: 18 Mar 2013 Last revised: 25 May 2016

See all articles by Dmitry Shapiro

Dmitry Shapiro

Department of Economics, Seoul National University

Anan Zhuang

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law

Multiple version iconThere are 2 versions of this paper

Date Written: October 14, 2013

Abstract

In the paper we develop a generalization of the Baker and Wurgler (2012) signaling model where investors are loss-averse to dividend cuts. We apply our framework to study how firm's characteristics and manager's incentives affect payout policy properties. Our results are as follows. First, we show that firms with riskier future returns are less likely to pay dividends. However, those firms that do pay, payout more. Second, firms whose managers have a higher share of stock options are less likely to pay dividends. Third, there is a clientele effect that is investors' preferences impact the dividend policy. We show that if firm's investors are less sensitive to dividend cuts then the firm is less likely to pay dividends. Furthermore, two otherwise identical firms might have dramatically different payout policy solely due to difference in investors' preferences. Finally, we relate our model's results to the disappearing dividend puzzle.

Keywords: Dividends, Signaling, Disappearing Dividend Puzzle, Loss-aversion

JEL Classification: G02, G35

Suggested Citation

Shapiro, Dmitry and Zhuang, Anan, Dividends as Signaling Device and the Disappearing Dividend Puzzle (October 14, 2013). Available at SSRN: https://ssrn.com/abstract=2235107 or http://dx.doi.org/10.2139/ssrn.2235107

Dmitry Shapiro (Contact Author)

Department of Economics, Seoul National University ( email )

San 56-1, Silim-dong, Kwanak-ku
Seoul 151-742

Anan Zhuang

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law ( email )

9201 University City Blvd.
Charlotte, NC 28223
United States

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