Dividends as Signaling Device and the Disappearing Dividend Puzzle
26 Pages Posted: 18 Mar 2013 Last revised: 25 May 2016
Date Written: October 14, 2013
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: Suggested Citation