Signaling Safety

100 Pages Posted: 22 Jan 2018 Last revised: 24 Mar 2023

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: January 2018

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.

Suggested Citation

Michaely, Roni and Rossi, Stefano and Weber, Michael, Signaling Safety (January 2018). NBER Working Paper No. w24237, Available at SSRN: https://ssrn.com/abstract=3106678

Roni Michaely (Contact Author)

The University of Hong Kong ( email )

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Stefano Rossi

Bocconi University ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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Michael Weber

University of Chicago - Finance ( email )

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United States

National Bureau of Economic Research (NBER)

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