Dividend Initiations, Information Content and Free Cash Flow - The Impact of the 2003 Dividend Tax Cut

65 Pages Posted: 19 Mar 2018 Last revised: 16 Jun 2019

See all articles by Balasingham Balachandran

Balasingham Balachandran

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Michael Theobald

University of Birmingham - Department of Accounting and Finance

Yun (Tracy) Zhou

Dept. of Economics and Finance, La Trobe University

Date Written: May 9, 2019

Abstract

We find strong evidence of information content for dividends initiated by firms with higher free cash flows and higher growth opportunities while there is no evidence of information content for dividends initiated by such firms in the pre-2003 dividend tax cut period. Further, we find some evidence of increases rather than decreases in capital expenditure following dividend initiations in the pre and post-tax cut periods for firms with higher preannouncement cash flows and lower growth opportunities, providing little support for the free cash flow hypothesis. Firms with higher abnormal operating performance experience higher post announcement long run abnormal returns.

Keywords: Dividend initiations, abnormal operating performance, Information content, long term stock returns

JEL Classification: G14, G32

Suggested Citation

Balachandran, Balasingham and Duong, Huu Nhan and Theobald, Michael F. and Zhou, Yun (Tracy), Dividend Initiations, Information Content and Free Cash Flow - The Impact of the 2003 Dividend Tax Cut (May 9, 2019). 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018. Available at SSRN: https://ssrn.com/abstract=3143691 or http://dx.doi.org/10.2139/ssrn.3143691

Balasingham Balachandran (Contact Author)

La Trobe University - School of Economics and Finance ( email )

La Trobe University
Bundoora, Vic, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Michael F. Theobald

University of Birmingham - Department of Accounting and Finance ( email )

Birmingham B15 2TT
United Kingdom
0121 414 6678 (Fax)

Yun (Tracy) Zhou

Dept. of Economics and Finance, La Trobe University ( email )

Bundoora
Bundoora, Victoria 3083 3086
Australia

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