Management forecast credibility and underreaction to news

In this paper, we first document evidence of underreaction to management forecast news. We then hypothesize that the credibility of the forecast influences the magnitude of this underreaction. Relying on evidence that more credible forecasts are associated with a larger reaction in the short window around the management forecasts and a smaller post-management forecast drift in returns, we show that the magnitude of the underreaction is smaller for firms that provide more credible forecasts. Our paper contributes to the literature by providing out-of-sample evidence of the drift in returns documented in the post-earnings-announcement drift literature, with the credibility of the news being one explanation for the phenomenon.     

Financial reporting complexity and investor underreaction to 10-K information

We study the immediate and delayed market reaction to U.S. Securities and Exchange Commission (SEC) EDGAR 10-K filings. Unusual trading volumes and stock-price movements are documented during the days around the 10-K filing dates. The abnormal price movements are positively associated with future accounting profitability, indicating that 10-K reports contain useful information about future firm performance. In addition, investors’ reaction to 10-K information seems sluggish, as demonstrated by the stock-price drift during the 12-month period after 10-K filing. We find that investors’ underreaction tends to be stronger for firms with more complex 10-K reports.     

A test of dividend irrelevance using volume reactions to a change in dividend policy

We investigate the implication of clientele theories that changes in dividend policy should result in a marked increase in trading volume as shareholder clienteles change. With 192 firms announcing their first cash dividend we document both an increase in trading volume and firm value around the announcement date. We integrate these results to distinguish between the volume response to good news about the future and clientele adjustments to a change in dividend policy. Our results suggest that volume increases primarily in response to the signal about future earnings contained in the dividend. Clientele adjustments are small.     

On the distribution of dividend payments and the discounted penalty function in a risk model with linear dividend barrier

In the framework of classical risk theory we investigate a model that allows for dividend payments according to a time-dependent linear barrier strategy. Partial integro-differential equations for Gerber and Shiu's discounted penalty function and for the moment generating function of the discounted sum of dividend payments are derived, which generalizes several recent results. Explicit expressions for the nth moment of the discounted sum of dividend payments and for the joint Laplace transform of the time to ruin and the surplus prior to ruin are derived for exponentially distributed claim amounts.     

Effective teaching and use of the constant growth dividend discount model

The appropriate application of the constant growth dividend discount model (DDM) requires an understanding of the fundamental nature of the model and its parameters. It is important that students not only be able to mechanically “plug and chug” the formula, but that they also understand the model’s assumptions, inputs, sensitivity to error and practical limitations. This paper demonstrates that the valuation measure derived from using the DDM is very sensitive to the relationship between the required return on investment (K_s) and the assumed growth rate (g) in earnings and dividends. Examples show that the valuation error increases at an increasing rate when the values of K_s and g converge in the formula. Classroom experience has indicated that students believe and strive to compute a single “correct” valuation of the share price. They should realize that the goal of valuation analysis is to estimate a reasonable range for the intrinsic value of a share price, rather than a single point estimate as often implied by end-of-chapter and exam-type problems using the DDM.     

Modeling and measuring intraday overreaction of stock prices

We introduce a model for stock prices consisting of a fundamental price process and a news impact curve, which allows for either overreaction, underreaction, or correct response to changes of the fundamental value. We further develop statistics based on OHLC data, which separately measure upside and downside overreaction. The distribution of these statistics under the hypothesis of correct response and fundamental prices following Brownian motions is used to derive tests for upside and downside overreaction. We show that more realistic and frequently used fundamental price processes with correct response leave the distribution of the test statistics widely unaffected or lead to conservative tests. Empirical application to different stock markets provides strong evidence for intraday overreaction, particularly to bad news. The economic significance of the discrimination induced by the proposed statistics is further illustrated by analyzing the performance of a simple buy on bad news strategy.     

A bibliometric review of dividend policy literature

This study systematically reviews the dividend policy literature, combining quantitative and qualitative techniques. We screened a sample of 270 articles retrieved from the Scopus database from 1981 to 2022. We contribute to the literature by identifying six research streams based on bibliometric co-citation analysis: (1) Dividend payment practices, (2) Price–dividend relationship, (3) Capital market valuation, and dividend policy, (4) Risk governance and dividend policy, (5) Taxes and dividend policy, and (6) The dividend disconnects and catering incentives. For each of these streams, the central research theme is outlined, allowing us to recommend potential directions for further investigation. We provide influential journals, authors, topics, articles, and institutions from our analyses. We also contribute 77 research questions that can be explored in future research to develop the field of dividend policy. Our findings should be of value to academics, financial executives, policymakers, investors, and other practitioners.     

Analysis of a threshold dividend strategy for a MAP risk model

We consider a class of Markovian risk models in which the insurer collects premiums at rate c₁(c₂) whenever the surplus level is below (above) a constant threshold level b. We derive the Laplace-Stieltjes transform (LST) of the distribution of the time to ruin as well as the LST (with respect to time) of the joint distribution of the time to ruin, the surplus prior to ruin, and the deficit at ruin. By interpreting that the insurer pays dividends continuously at rate c₁?c₂ whenever the surplus level is above b, we also derive the expected discounted value of total dividend payments made prior to ruin. Our results are obtained by making use of an existing connection which links an insurer's surplus process to an embedded fluid flow process.     

The effect of information shocks on dividend payout and dividend value relevance

We exploit the mandatory adoption of International Financial Reporting Standards (IFRS) as a source of exogenous shock to the corporate financial information environment to study the potential effect that this information shock might have on the dividend payout policy and dividend value relevance in the UK and France. We employ a difference-in-differences research design, in which our choice of the control and treatment groups is mainly based on the divergence between domestic accounting standards and IFRS, while holding institutional factors constant. The UK domestic accounting standards slightly diverge from IFRS (low-divergence firms), whereas French domestic accounting standards substantially diverge from IFRS (high-divergence firms). Nevertheless, both countries have similar institutional factors that might confound the effect of IFRS adoption. Our theoretical argument is that IFRS adoption is expected to mitigate information asymmetry, a major reason for the free cash flow problem (Jensen, 1986) and cash over-retention (Myers & Majluf, 1984). Our findings suggest that IFRS adoption is a major contributor in increasing dividend payouts among high-divergence firms via reduction of asymmetric information. Moreover, improving the information environment helps investors become more confident about using accounting numbers to assess firm financial performance, which causes a significant reduction in dividend value relevance among high-divergence firms.     

A better way to deliver bad news

In an ideal world, a subordinate would accept critical feedback from a manager with an open mind. He or she would ask a few clarifying questions, promise to work on certain performance areas, and show signs of improvement over time. But things don't always turn out that way. Such conversations can be unpleasant. Emotions can run high; tempers can flare. Fearing that the employee will become angry and defensive, the boss all too often inadvertently sabotages the meeting by preparing for it in a way that stifles honest discussion. This unintentional--indeed, unconscious--stress-induced habit makes it difficult to deliver corrective feedback effectively. Insead professor Jean-Fran?ois Manzoni says that by changing the mind-set with which they develop and deliver negative feedback, managers can increase their odds of having productive conversations without damaging relationships. Manzoni describes two behavioral phenomena that color the feedback process--the fundamental attribution error and the false consensus effect--and uses real-world examples to demonstrate how bosses' critiques can go astray. Managers tend to frame difficult situations and decisions in a way that is narrow (alternatives aren't considered) and binary (there are only two possible outcomes--win or lose). And during the feedback discussion, managers' framing of the issues often remains frozen, regardless of the direction the conversation takes. Manzoni advises managers not to just settle on the first acceptable explanation for a behavior or situation they've witnessed. Bosses also need to consider an employee's circumstances rather than just attributing weak performance to a person's disposition. In short, delivering more effective feedback requires an open-minded approach, one that will convince employees that the process is fair and that the boss is ready for an honest conversation.     

The effects of dividend yield and dividend policy on common stock prices and returns

This paper suggests that it is not possible to demonstrate, using the best available empirical methods, that the expected returns on high yield common stocks differ from the expected returns on low yield common stocks either before or after taxes. A taxable investor who concentrates his portfolio in low yield securities cannot tell from the data whether he is increasing or decreasing his expected after-tax return by so doing. A tax exempt investor who concentrates his portfolio in high yield securities cannot tell from the data whether he is increasing or decreasing his expected return. We argue that the best method for testing the effects of dividend policy on stock prices is to test the effects of dividend yield on stock returns. Thus the fact that we cannot tell, using the best available methods, what effects dividend yield has on stock returns implies that we cannot tell what effect, if any, a change in dividend policy will have on a corporation's stock price.     

Optimal dividend payments in the classical risk model when payments are subject to both transaction costs and taxes

In this paper, we study optimal dividend problem in the classical risk model. Transaction costs and taxes are required when dividends occur. The problem is formulated as a stochastic impulse control problem. By solving the corresponding quasi-variational inequality, we obtain the analytical solutions of the optimal return function and the optimal dividend strategy when claims are exponentially distributed. We also find a formula for the expected time between dividends. The results show that, as the dividend tax rate decreases, it is optimal for the shareholders to receive smaller but more frequent dividend payments.     

Stakeholder conflicts and dividend policy

This paper compares the dividend policy of owner-controlled firms with that of firms where the owners are a minority relative to non-owner employees, customers, and community citizens. We find that regardless of whether owners or non-owners control the firm, the strong stakeholder uses the dividend payout decision to mitigate rather than to intensify the conflict of interest with the weak stakeholder. Hence, the higher the potential agency cost as reflected in the firm’s stakeholder structure, the more the actual agency cost is reduced by the strong stakeholder’s dividend payout decision. These findings are consistent with a dividend policy in which opportunistic power abuse in stakeholder conflicts is discouraged by costly consequences for the abuser at a later stage. Indirect evidence supports this interpretation.     

Semiparametric estimation in the optimal dividend barrier for the classical risk model

In the context of an insurance portfolio which provides dividend income for the insurance company’s shareholders, an important problem in risk theory is how the premium income will be paid to the shareholders as dividends according to a barrier strategy until the next claim occurs whenever the surplus attains the level of ‘barrier’. In this paper, we are concerned with the estimation of optimal dividend barrier, defined as the level of the barrier that maximizes the expected discounted dividends until ruin, under the widely used compound Poisson model as the aggregate claims process. We propose a semi-parametric statistical procedure for estimation of the optimal dividend barrier, which is critically needed in applications. We first construct a consistent estimator of the objective function that is complexly related to the expected discounted dividends and then the estimated optimal dividend barrier as the minimizer of the estimated objective function. In theory, we show that the constructed estimator of the optimal dividend barrier is statistically consistent. Numerical experiments by both simulated and real data analyses demonstrate that the proposed estimators work reasonably well with an appropriate size of samples.     

Optimal dividend control for a generalized risk model with investment incomes and debit interest

This paper investigates dividend optimization of an insurance corporation under a more realistic model, which takes into consideration refinancing or capital injections. The model follows the compound Poisson framework with credit interest for positive reserve and debit interest for negative reserve. Ruin occurs when the reserve drops below the critical value. The company controls the dividend pay-out dynamically with the objective to maximize the expected total discounted dividends until ruin. We show that the optimal strategy, is a band strategy and it is optimal to pay no dividends when the reserve is negative.     

Environmental taxation and the double dividend: A reader's guide

There has been considerable debate as to whether the revenue-neutral substitution of environmental taxes for ordinary income taxes might offer a double dividend: not only (1) improve the environment but also (2) reduce certain costs of the tax system. This paper articulates different notions of double dividend and examines the theoretical and empirical evidence for each. It also connects the double-dividend issue with principles of optimal environmental taxation in a second-best setting.A weak double-dividend claim-that returning tax revenues through cuts in distortionary taxes leads to cost savings relative to the case where revenues are returned lump sum-is easily defended on theoretical grounds and (thankfully) receives wide support from numerical simulations. The stronger versions contend that revenueneutral swaps of environmental taxes for ordinary distortionary taxes involve zero or negative gross costs. Theoretical analyses and numerical results tend to cast doubt on the strong double-dividend claim, although the theoretical case is not air-tight and the numerical evidence is mixed.     

Do firms use dividend changes to signal future profitability? A simultaneous equation analysis

This paper retests the signaling hypothesis of dividends by examining whether managers change dividends to signal their expectation of earnings prospects using a simultaneous-equation approach. This approach allows us to more clearly test the earnings prospects signaling hypothesis and facilitates the control of several alternative motives that managers may have for changing dividends. We also examine the information content of dividend changes with respect to future earnings changes in the same model system. Our results show that managers change dividends to signal equity-scaled rather than asset-scaled earnings prospects. In addition, we find evidence that managers also change dividends for signaling previous earnings changes and for catering to dividend clienteles. As for the information content of dividend changes, we find that dividend changes have significant and negative impact on ROA changes. The findings suggest that if investors consistently cannot recognize the signaling purpose and find that dividend increases (decreases) are not useful in predicting favorable (unfavorable) future earnings, managers may someday give up using dividend changes to signal the earnings prospects of their firms because they cannot obtain the expected market benefits anymore.     

The link between bank monitoring and corporate dividend policy: The case of dividend omissions

This study investigates whether bank monitoring influences investor response to a borrowing firm's decision to omit its dividend payments. We establish a new link between the theories of banking and dividend policy in an examination of how bank monitoring and firm dividend signals complement one another to resolve information asymmetries. Results indicate that, for small firms, investors interpret the dividend decision as a function of bank monitoring and the dividend signals taken together. Also reported are the results of tests examining the differences between the monitoring effects of banks versus public and private non-bank lenders.     

The ex-date impact of special dividend announcements: A note

This study examines the impact of special dividend announcements for a sample of Australian companies on the ex date of the special dividend. This study documents that the drop-off ratio is significantly greater for special dividends that participate in DRPs than non-DRPs. Further, it reveals that the drop-off ratio is greater for resources firms than for financial and industrial firms. Finally, a cross-sectional regression model reveals that the drop in price on the ex-date is significantly related to the announcement period price reaction, DRPs versus non-DRPs, size of the company, and special dividend per share.