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
Date Written: May 9, 2019
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: Suggested Citation