Investment as the Opportunity Cost of Dividend Signaling

70 Pages Posted: 10 Jun 2019 Last revised: 30 Jun 2021

See all articles by Zachary Kaplan

Zachary Kaplan

Washington University in St. Louis - John M. Olin Business School

Gerardo Perez Cavazos

University of California, San Diego (UCSD)

Date Written: January 6, 2020

Abstract

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

Kaplan, Zachary and Perez Cavazos, Gerardo, Investment as the Opportunity Cost of Dividend Signaling (January 6, 2020). Available at SSRN: https://ssrn.com/abstract=3393065 or http://dx.doi.org/10.2139/ssrn.3393065

Zachary Kaplan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Gerardo Perez Cavazos

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
La Jolla, CA 92093
United States

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