Dividends: Relevance,rigidity, and signaling |
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| Affiliation: | 1. University of Antwerp, Prinsstraat 13, 2000 Antwerp, Belgium;2. Antwerp Management School, Belgium;1. Accounting & Finance, Adelaide Business School, University of Adelaide, Australia;2. Department of Applied Finance and Actuarial Studies, Faculty of Business and Economics, Macquarie University, Australia;1. Department of Finance, Albers School of Business and Economics, Seattle University, 901 12th Avenue, P.O. Box 222000, Seattle WA 98122, United States;2. Hanken School of Economics, Department of Finance and Statistics, P.O. Box 470, 00101 Helsinki, Finland;3. Department of Accounting, Albers School of Business and Economics, Seattle University, 901 12th Avenue, P.O. Box 222000, Seattle WA 98122, United States |
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| Abstract: | This paper uses a dynamic partial equilibrium model to explain a puzzle of dividend smoothing. In contrast to the Modigliani–Miller theory, I show that firm value depends on payout policy. The analysis implies that firms with more stable dividend stream are more valuable. This explains why dividends are rigid over time. A volatile component of dividends is introduced to reduce the likelihood of dividend omission in bad times while keeping the same historical average dividends. I show that the empirically observed positive relation between dividends and future firm performance is a statistical artifact driven by dividend smoothing. Thus, the empirical tests of dividend signaling theory might be misspecified. |
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