The Information Content of Dividends: Safer Profits, Not Higher Profits

80 Pages Posted: 4 Nov 2017 Last revised: 24 Jan 2018

See all articles by Roni Michaely

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Stefano Rossi

Bocconi University; Krannert School of Management; Centre for Economic Policy Research (CEPR)

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 4 versions of this paper

Date Written: January 16, 2018

Abstract

Contrary to signaling models’ central predictions, changes in profits do not empirically follow changes in dividends, and firms with the least need to signal pay the bulk of dividends. We show both theoretically and empirically that dividends signal safer, rather than higher, future profits. Using the Campbell (1991) decomposition we find that cash-flow-volatility changes follow dividend and repurchase changes (in opposite direction), and that larger volatility changes come with larger announcement returns consistent with our model's predictions. The data support the prediction that the signaling cost is foregone investment opportunities. We conclude payout policy conveys information about future cash-flow volatility.

Keywords: Dividends, Payout Policy, Cash Flow Volatility, Signaling Model

JEL Classification: G35

Suggested Citation

Michaely, Roni and Rossi, Stefano and Weber, Michael, The Information Content of Dividends: Safer Profits, Not Higher Profits (January 16, 2018). Chicago Booth Research Paper 17-30; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=3064029 or http://dx.doi.org/10.2139/ssrn.3064029

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Stefano Rossi

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Krannert School of Management ( email )

West Lafayette, IN 47907-1310
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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