Signaling Safety

110 Pages Posted: 4 Nov 2017 Last revised: 26 Feb 2020

See all articles by Roni Michaely

Roni Michaely

The University of Hong Kong; ECGI

Stefano Rossi

Bocconi University; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Michael Weber

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 5 versions of this paper

Date Written: February 1, 2020

Abstract

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-flow volatility (in opposite direction); (2) larger cash-flow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-flow 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

Michaely, Roni and Rossi, Stefano and Weber, Michael, Signaling Safety (February 1, 2020). Chicago Booth Research Paper 17-30, Fama-Miller Working Paper, European Corporate Governance Institute – Finance Working Paper No. 653/2020, Swiss Finance Institute Research Paper No. 17-30, Available at SSRN: https://ssrn.com/abstract=3064029 or http://dx.doi.org/10.2139/ssrn.3064029

Roni Michaely

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Stefano Rossi

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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