Investment as the Opportunity Cost of Dividend Signaling
70 Pages Posted: 10 Jun 2019 Last revised: 30 Jun 2021
Date Written: January 6, 2020
We provide evidence that dividends signal sustainable earnings generated by assets-in-place for firms with weak investment opportunities. In the cross-section, both dividend levels and changes contain more earnings information among firms with weaker investment opportunities. Intertemporally, when aggregate investment opportunities in the economy are worse, dividend changes convey more earnings information. In contrast, dividends have a more negative association with investment spending for firms with strong growth options, as funding investment is a higher priority for those firms. Collectively, our findings suggest that dividends serve as a counter-signal, whereby additional information about investment opportunities give rise to signaling that is non-monotonic in firm quality.
Keywords: dividends, payout policy, signaling, earnings, capital structure
JEL Classification: G15, G32, G35
Suggested Citation: Suggested Citation