Efficient Signalling with Dividends and Investments

An efficient signalling equilibrium with dividends and investments or, equivalently, dividends and net new issues of stock is constructed, and its properties are identified. Because corporate insiders can exploit multiple signals, the efficient mix must minimize dissipative costs. In equilibrium, many firms both distribute dividends and deviate from first-best investment. Also, the impact of dividends on stock prices is positive. By contrast, the announcement effect of new stock is negative for firms with private information primarily about assets in place and positive for firms with inside information mainly about opportunities to invest.     

Stock Splits and Stock Dividends: Why,Who, and When

This study investigates empirically why firms split their stock or distribute stock dividends and why the market reacts favorably to these distributions. The findings suggest that stock splits are mainly aimed at restoring stock prices to a “normal range.” Some support can also be found for the oft-mentioned signalling motive of stock splits. Stock dividends are altogether different from stock splits, and they appear to be a decreasing phenomenon. The clue to stock dividend distributions may lie in their perceived substitution for relatively low cash dividends.     

Dividend preference of tradable‐share and non‐tradable‐share holders in Mainland China

Comprehensive data on corporate announcements of Chinese firms allows us to examine the preference for, and determinants of, cash and stock dividends. The results indicate that Chinese public investors prefer stock dividends over cash dividends, which are preferred by large state and legal person shareholders generally. Stock dividends, which do not require an explicit cash outflow from a firm, are found to be positively related to higher earnings, supporting the signalling hypothesis of dividend policy. In an imperfect market, these results have some implications for government regulation of financial markets.     

Regular Dividend Announcements and Future Unexpected Earnings: An Empirical Analysis

Previous studies have interpreted stock price reaction to dividend announcements as being consistent with the hypothesis that any changes are forecasts of future corporate profits. Recent studies seem to provide evidence to this effect. This study provides additional empirical evidence pertaining to the issue of whether quarterly cash dividend announcements convey useful information about a firm's future profitability, beyond that contained in contemporaneous quarterly earnings announcements. The association between unexpected changes in quarterly dividends and unexpected accounting earnings in subsequent quarters is examined, after controlling for information contained in past and current earnings series. The results, based on a large sample of regular quarterly cash dividend changes, indicate that firms that increased (decreased) their dividends realized, on average, greater (smaller) unexpected accounting earnings in subsequent periods than firms that did not change their dividends.     

Efficient Signalling with Dividends,Investment, and Stock Repurchases

The efficient mix of dissipative dividends, investments in real and financial assets, and repurchases of stock is computed for a continuum of firms with inside information about the return on risky real assets. In the efficient signalling equilibrium, the representative firm optimally distributes dividends, invests in risky real assets to maximize net present value, holds no financial securities, and sells new stock in the market. This firm finances its value-maximizing investment first from internal funds and second from stock sold to new investors.     

Repurchase premia as a reason for dividends: a dynamic model of corporate payout policies

We propose that it is precisely because firms' repurchases oftheir own stock through tender offers are associated with largestock-price increases that repurchases are unattractive as ameans o distributing cash. As a result, firms distribute somecash in the form of dividends - despite the tax disadvantage- and carry the rest to future periods. However, when theirstock is sufficiently undervalued, firms distribute all accumulatedcash through stock repurchases. We show that dividends are smoothedand are positively related both to earnings innovations andto previous period's dividends. Also, the stock-price reactionto a repurchase announcement, of a given size, is increasingin the previous period's dividends.     

The role of cross-listing,foreign ownership and state ownership in dividend policy in an emerging market

In this paper, we investigate if dividend policy is influenced by ownership type. Within the dividend literature, dividends have a signaling role regarding agency costs, such that dividends may diminish insider conflicts (reduce free cash flow) or may be used to extract cash from firms (tunneling effect) – which could be predominant in emerging markets. We expect firms with foreign ownership and those that are listed in overseas markets to have different dividend policies and practices than those that are not, and firms with more state ownership and less individual ownership to be more likely to pay cash dividends and less likely to pay stock dividends. Using firms from an emerging economy (China), we examine whether these effects exist in corporate dividend policy and practice. We find that both foreign ownership and cross-listing have significant negative effects on cash dividends, consistent with the signaling effect and the notion of reduced tunneling activities for firms with the ability to raise capital from outside of China. Consistent with the tunneling effect, we find that firms with higher state ownership tend to pay higher cash dividends and lower stock dividends, while the opposite is true for public (individual) ownership. Further analysis shows that foreign ownership mediates the effect of state ownership on dividend policy. Our results have significant implications for researchers, investors, policy makers and regulators in emerging markets.     

EVIDENCE ON HOW COMPANIES CHOOSE BETWEEN DIVIDENDS AND OPEN-MARKET STOCK REPURCHASES

Dividends and open-market stock repurchases are by far the two most common mechanisms for distributing excess cash to shareholders. This article identifies and then tests three potentially important factors for the corporate choice between increasing cash dividends and initiating openmarket stock repurchases. More specifically, the authors argue that companies are more likely to distribute cash to investors through open-market repurchases than through dividend increases when (1) management believes its stock is undervalued, (2) management compensation packages include stock options, and (3) the company's stockholder base is dominated by institutional investors.
To test these three explanations, the authors use a matched-pair design in which each company announcing an open market repurchase program in a given year is matched with a comparable-size firm from the same industry that increased its cash dividends but did not initiate an open-market repurchase program. As predicted, the results suggest that equity undervaluation, management compensation, and the level of institutional holdings are all important contributors to corporate choices between dividend increases and open-market repurchases.     

Corporate payout policy in dual-class firms

We examine corporate payout policy in dual-class firms. The expropriation hypothesis predicts that dual-class firms pay out less to shareholders because entrenched managers want to maximize the value of assets under control and the associated private benefits. The pre-commitment hypothesis predicts that dual-class firms pay out more to shareholders because firms use corporate payouts as a pre-commitment device to mitigate agency costs. Our results support the pre-commitment hypothesis. Dual-class firms have higher cash dividend payments and total payouts, and they use more regular cash dividends rather than special dividends or repurchases, compared to their propensity-matched single-class firms. Dual-class firms with severe free cash flow-related agency problems and few growth opportunities rely even more on corporate payouts as a pre-commitment mechanism. We also rule out the alternative explanation that dual-class firms pay out more because super-voting shareholders lack the ability to generate home-made dividends by selling shares since super-voting shares are often non-tradable or very illiquid.     

Why companies do not pay cash dividends: The Turkish experience

This study uses a survey approach to examine the views of corporate managers of non-dividend-paying firms listed on the Borsa Istanbul (BIST) in order to identify the factors leading to the decision not to pay cash dividends in Turkey. Our survey results show that cash constraints, growth opportunities, low profitability and earnings, and the cost of raising external funds (debt) are the major reasons inducing BIST firms not to pay dividends. Additionally, non-dividend-paying firms consider their shareholder preferences when setting a policy of paying no cash dividends. Yet, they neither view taxes as an important factor for paying no dividends nor perceive that stock repurchases are substitutes for cash dividends. Statistical analysis using secondary data of publicly-traded BIST firms reveals whether the actual corporate actions are consistent with the managerial views revealed by our survey research. These tests show that growth opportunities and debt level have a negative effect on the dividend payment decisions of BIST firms. Also, large blockholders and the existence of multiple large shareholders reduce the likelihood and intensity of paying a cash dividend in the Turkish market. Overall, the evidence suggests that non-dividend-paying companies are likely to be smaller in size, relatively younger (in the earlier stage of their life cycle) with high-growth opportunities or with a low level of profitability (or even loss) and small (negative) earnings. By contrast, highly-profitable, mature and large-size corporations are more likely to pay cash dividends.     

Corporate Cash Policy and How to Manage it with Stock Repurchases

At the end of 2004 total U.S. corporate cash holdings reached an all‐time high of just under $2 trillion—an amount equal to roughly 15% of the total U.S. GDP. And during the past 25 years, average cash holdings have jumped from 10% to 23% of total corporate assets. But at the same time their levels of cash have risen, U.S. companies have paid out dramatically increasing amounts of cash to buy back shares. This article addresses the following questions: What accounts for the dramatic increase in the average level of corporate cash holdings since 1980? And why do some companies keep so much cash (with one fourth of U.S. firms holding cash amounting to at least 36% of total assets) while others have so little (with another quarter having less than 3%)? Why do companies pay out excess cash in the form of stock repurchases (rather than, say, dividends), and what explains the significant increase in repurchases (both in absolute terms and relative to dividends) over time? The author begins by arguing that cash reserves provide companies with a buffer against possible shortfalls in operating profits—one that, especially during periods of financial trouble, can be used to avoid financial distress or provide funding for promising projects that might otherwise have to be put off. Such buffers are particularly valuable in the case of smaller, riskier companies with lots of growth opportunities and limited access to capital markets. And the dramatic increase in corporate cash holdings between 1980 and the present can be attributed mainly to an increase in the risk of publicly traded companies—an increase in risk that reflects in part a general increase in competition, but also a notable change over time in the kinds of companies (smaller, newer, less profitable, non‐dividend paying firms) that have chosen to go public. At the other end of the corporate spectrum are large, relatively mature companies with limited growth opportunities. Although such companies tend to produce considerable free cash flow, they also tend to retain relatively small amounts of cash (as a percentage of total assets), in part because of shareholder concern about the corporate “free cash flow problem”—the well‐documented tendency of such companies to destroy value through overpriced (often diversifying) acquisitions and other misguided attempts to pursue growth at the expense of profitability. For companies with highly predictable earnings and investment plans, dividends provide one means of addressing the free cash flow problem. But for companies with more variable earnings and less predictable reinvestment, open‐market stock repurchases provide a more flexible means of distributing cash to shareholders. Unlike the corporate “commitment” implied by dividend payments, an open market stock repurchase program creates what amounts to an option but not an obligation to distribute funds. The value of such flexibility, which increases during periods of increased risk and uncertainty, explains much of the apparent substitution of repurchases for dividends in recent years.     

Stock repurchases: A further test of the free cash flow hypothesis

This study explores the empirical puzzle currently existing regarding the observed positive stock price reaction associated with self-tender offer announcements. The puzzle stems from Lang and Litzenberger's (1989) findings that Jensen's (1986, 1989) free cash flow (overinvestment) hypothesis is consistent with changes in cash dividends, whereas Howe, He and Kao's (1992) study of analogous cash events (i.e., self-tender offers and specially designated dividends) finds no support for the free cash flow hypothesis. By stratifying our sample of firms repurchasing their stock by the source of the firm's free cash flow (overinvestment) problem, additional light is shed on the interaction between the signalling and free cash flow theories.     

Reputation as a governance mechanism? Evidence from payout policy of insider‐controlled firms in Taiwan

This paper examines the effect of entrenched insiders’ reputational concerns on corporate payout policy in Taiwan, a market in which typical public firms are controlled by a single dominant shareholder who is subject to weak takeover threats and has incentives and abilities to extract private benefits by oppressing minority equity holders. The reputation‐building hypothesis predicts that firms with higher expropriation risk by a controlling shareholder make more payouts to credibly commit not to expropriate minority shareholders, thereby establishing reputation in the capital market for risk diversification and low‐cost external financing. I show that corporate payout intensity is significantly and positively correlated with measures related to the moral hazard of dominant owners. The reputation effect manifests in firms that most value it; the interaction analyses indicate that younger, smaller, or growth firms with higher controlling shareholder expropriation risk pay more cash dividends. Moreover, firms are less likely to omit dividends and more likely to resume dividends when their controlling shareholders are more entrenched. Finally, I show that the value of cash dividends is higher for firms with higher controlling shareholder expropriation risk and that expected dividend increases in these firms are value enhancing.     

Readability of narrative disclosures,and corporate liquidity and payout policies

In this paper, we examine the relation between the readability of narrative disclosures in 10-K reports, and corporate liquidity and payout policies. We find that firms with less readable disclosures hold significantly more cash. We also find that this relationship is stronger for firms with weak corporate governance, and with higher financing constraints and refinancing risks. Further analysis also shows that firms with less readable disclosures pay fewer cash dividends and repurchase less stock. Our findings are robust to different estimation methods, and to alternative specifications of key variables. The findings from this study contribute to the emerging research that stresses the importance of 10-K report readability in protecting shareholder wealth.     

Dividend tax signaling and the pricing of future earnings: a case of taxable stock dividends

The purpose of our study is to explore what types of information content are conveyed by dividends on future earnings. We examine this issue by investigating the effect of dividends on the association between current year stock returns and future earnings (i.e. the future earnings response coefficient, FERC). Based on exploring the Taiwan market, our results reveal that taxable stock dividends enhance the FERC while nontaxable stock dividends do not, consistent with the tax-based signaling argument. We also find a positive relation between cash dividends and the FERC in firms with severe free cash flow problems, and this suggests that higher cash payouts mitigate manager over-investment so future earnings are more highly valued, consistent with the agency argument. Our main contributions are to specify what factors make dividends informative with regard to future earnings and the provision of evidence to support the tax-based signaling model.     

股利政策与公司过度投资行为研究

基于Richardson(2006)的过度投资测度,本文考察公司的股利支付政策是否影响了企业的过度投资。我们发现:首先,对总样本而言,我国公司普遍存在过度投资的现象;其次,现金股利的派发的确能有效制约过度投资行为;第三,经常派现公司较非经常派现公司在现金股利抑制过度投资的效果上有显著增强;最后,由于管理层存在对未来现金流的一定预期,现金股利在低自由现金流的公司中能发挥更好的抑制效果。     

The Effects of Cash,Debt, and Insiders on Open Market Share Repurchases

The findings of the authors' recent study suggest, on balance, that stock repurchases function much like tax‐efficient special dividends, increasing when free cash flow is large and when debt levels are low, but not replacing regularly scheduled dividends. Repurchasing companies experience median event returns of about 2% around the repurchase announcements, with a related mean effect of roughly 3%. Companies with greater free cash flow and less debt are more likely than otherwise comparable companies to repurchase their shares. Furthermore, repurchasing companies that exhibit substandard preannouncement stock price returns and seek to buy back higher percentages of shares tend to elicit more positive stock price reactions. At the same time, the study provides some evidence that corporate managers attempt to use their inside information to profit from buybacks. For example, managing insiders in repurchasing firms decrease their selling activity and increase their buying activity two weeks before repurchase announcements to a greater extent than non‐managing insiders. But perhaps the most remarkable finding from this part of the study is how little insiders as a group seem to profit from their short‐term trading behavior—a finding that suggests that the market appears to anticipate much of this behavior.     

Discretionary accruals: signalling or earnings management in Australia?

We investigate the signalling effect of discretionary accruals (DAC). Although we find that discretionary accruals are insignificantly related to contemporaneous stock returns, we uncover that income‐increasing discretionary accruals of GAAP‐complying growth firms are significantly and positively related to contemporaneous stock returns. Furthermore, we find that this positive effect is stronger among firms with better corporate governance mechanisms, such as Board of Directors Independence, Audit Committee Independence and Large Shareholders’ Ownership. In addition to contemporaneous stock returns, we also find similar results with the future increase in dividends. Our findings are consistent with the argument that corporate governance can enhance the signalling effect of reported earnings of GAAP‐complying growth firms.     

Corporate Financial Policy and the Value of Cash

We examine the cross‐sectional variation in the marginal value of corporate cash holdings that arises from differences in corporate financial policy. We begin by providing semi‐quantitative predictions for the value of an extra dollar of cash depending upon the likely use of that dollar, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases.     

Managerial motivation and timing of open market share repurchases

There are two major mechanisms by which managers distribute cash to shareholders: through dividends and share repurchases. Historically, dividends have been the preferred method, but in recent years, share repurchases have become more popular, with more firms using repurchases than dividends to distribute cash. During the sample period of 2004–2006, 6.5 billion shares were repurchased for a total dollar volume amount of $222 billion. Using a unique dataset on actual monthly share repurchases, this paper investigates when and why managers repurchase shares in the open market. The paper finds evidence that firms which make repurchases are jointly timing their repurchases to perceived undervaluation and the presence of discretionary cash flow. In addition, the paper finds evidence which supports that (1) firms in competitive industries tend to repurchase less, (2) firms tend to substitute repurchases for anti-takeover provision adoption, and (3) firms attempt to manage earnings upward through the use of repurchases.