102 Pages Posted: 4 Nov 2017 Last revised: 7 Dec 2019
Date Written: November 1, 2019
Contrary to signaling models' central predictions, changes in the level of cash flows do not empirically follow changes in dividends. We use the Campbell (1991) decomposition to construct cash-flow and discount-rate news from returns and find the following: (1) Both dividend changes and repurchase announcements signal changes in cash-ow volatility (in opposite direction); (2) larger cash-ow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-ow news, nor total stock return volatility change following dividend changes. We conclude cash-flow news—and not discount-rate news—drive payout policy, and payout policy conveys information about future cash-flow volatility.
Keywords: Dividends, Payout Policy, Cash-Flow Volatility, Signaling Model
JEL Classification: G35
Suggested Citation: Suggested Citation