The Information Content of Dividends: Safer Profits, Not Higher Profits
80 Pages Posted: 4 Nov 2017 Last revised: 24 Jan 2018
Date Written: January 16, 2018
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: Suggested Citation