Signaling Safety

102 Pages Posted: 17 Dec 2019

See all articles by Stefano Rossi

Stefano Rossi

Bocconi University; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Michael Weber

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Roni Michaely

The University of Hong Kong; ECGI

Multiple version iconThere are 5 versions of this paper

Date Written: December 2019

Abstract

Contrary to signaling models' central predictions, changes in the level of cash flows do not empirically follow changes in dividends. We use the Campbell (1991) decomposition to construct cash-flow and discount-rate news from returns and find the following: (1) Both dividend changes and repurchase announcements signal changes in cash-flow volatility (in opposite direction); (2) larger cash-flow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-flow news, nor total stock return volatility change following dividend changes. We conclude cash-flow news--and not discount-rate news--drive payout policy, and payout policy conveys information about future cash-flow volatility.

Keywords: cash-flow volatility, dividends, Payout policy, signaling model

JEL Classification: G35

Suggested Citation

Rossi, Stefano and Weber, Michael and Michaely, Roni, Signaling Safety (December 2019). CEPR Discussion Paper No. DP14174, Available at SSRN: https://ssrn.com/abstract=3504603

Stefano Rossi

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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Belgium

Michael Weber

University of Chicago - Finance ( email )

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National Bureau of Economic Research (NBER)

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Roni Michaely (Contact Author)

The University of Hong Kong ( email )

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Hong Kong, Pokfulam HK
China

ECGI ( email )

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1000 Brussels
Belgium

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