The Importance of Being Prudent: Leverage and the Informational Content of Dividends

52 Pages Posted: 24 Jul 2018

Date Written: July 2, 2018

Abstract

This paper studies how the informational content of dividends is affected by leverage. While higher dividends convey good news at low levels of leverage, dividends become a bad signal when leverage is high. Quantitatively, a dividend increase is predicted to have a positive stock price reaction for the median public U.S. firm, but the effect is reversed at higher levels of leverage. The same switch occurs for other corporate actions, including debt buybacks, debt issuance and risk taking. The results highlight the importance of studying the various determinants of firms’ financial decisions jointly.

Keywords: Signaling, dividends, agency costs of debt, banks

JEL Classification: D82, G21, G35

Suggested Citation

Kucinskas, Simas, The Importance of Being Prudent: Leverage and the Informational Content of Dividends (July 2, 2018). Available at SSRN: https://ssrn.com/abstract=3206734 or http://dx.doi.org/10.2139/ssrn.3206734

Simas Kucinskas (Contact Author)

Humboldt University of Berlin

Dorotheenstrasse 1
Berlin, Berlin 10099
Germany

HOME PAGE: http://www.simaskucinskas.com

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