Signaling, Investment Opportunities, and Dividend Announcements

Posted: 25 Aug 1998

See all articles by Pyung Sig Yoon

Pyung Sig Yoon

University of Texas at Austin - Department of Finance; Chungnam National University

Laura T. Starks

University of Texas at Austin - Department of Finance

Abstract

This paper examines potential explanations for the wealth effects surrounding dividend change announcements. We find that new information concerning managers' investment policies is not revealed at the time of the dividendannouncement. We also find that dividend increases (decreases) are associated with subsequent significant increases (decreases) in capital expenditures over the three years following the dividend change and that dividend change announcements are associated with revisions in analysts' forecasts of current earnings. These results are consistent with the cash-flow-signaling hypothesis rather than the free-cash-flow hypothesis as an explanation for the observed stock price reactions to dividend change announcements.

JEL Classification: G32

Suggested Citation

Yoon, Pyung Sig and Starks, Laura T., Signaling, Investment Opportunities, and Dividend Announcements. Available at SSRN: https://ssrn.com/abstract=6705

Pyung Sig Yoon

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Chungnam National University ( email )

Daejon, 34134
Korea, Republic of (South Korea)

Laura T. Starks (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

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