Information Environment, Dividend Changes, and Signaling: Evidence from ADR Firms

47 Pages Posted: 19 Oct 2006 Last revised: 22 Jan 2016

See all articles by Raj Aggarwal

Raj Aggarwal

University of Akron; Federal Reserve Banks - Federal Reserve Bank of Cleveland

Jian Cao

Florida Atlantic University

Feng Chen

University of Toronto - Rotman School of Management

Date Written: April 14, 2010

Abstract

While theory suggests that dividends can be an important signal for firm performance, prior studies have been unable to provide strong evidence of dividend signaling among publicly listed U.S. companies. One potential explanation for this inconsistency between theory and empirical evidence is that the cross-sectional variation in information asymmetry across U.S. firms is insufficient to provide adequate test power. In this study, we revisit the link between dividend signaling and firms’ information environment by examining the dividend behavior of foreign firms that cross-list on the U.S. stock market in the form of American Depository Receipts (ADRs). Our evidence suggests that ADR firms with poorer information environments have stronger incentives to adopt dividend increases as a signaling device. We also find that such firms experience an increase in one-year-ahead earnings and a decline in systematic risk following a dividend increase. Additional analysis shows that ADR firms have fewer other information channels compared to similar U.S. firms. Overall, we provide evidence consistent with the importance of dividend signaling, especially for firms with poorer information environments.

Keywords: ADR Firms, Dividend Sgnaling, Earnings, Information Environment

JEL Classification: G14, G35, M41, F36

Suggested Citation

Aggarwal, Raj and Cao, Jian and Chen, Feng, Information Environment, Dividend Changes, and Signaling: Evidence from ADR Firms (April 14, 2010). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=938204 or http://dx.doi.org/10.2139/ssrn.938204

Raj Aggarwal

University of Akron ( email )

Akron, OH 44325-4803
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Jian Cao

Florida Atlantic University ( email )

777 Glades Rd.
Boca Raton, FL 33431
United States
561-297-3727 (Phone)

Feng Chen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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