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The Information Content of Dividend Changes: Cash Flow Signaling, Overinvestment, and Dividend Clienteles

Published online by Cambridge University Press:  06 April 2009

David J. Denis ,
Diane K. Denis  and
Atulya Sarin
David J. Denis
Affiliation:
R. B. Pamplin College of Business, Virginia Polytechnic Institute and State University, Blacksburg, VA 24061
Diane K. Denis
Affiliation:
R. B. Pamplin College of Business, Virginia Polytechnic Institute and State University, Blacksburg, VA 24061
Atulya Sarin
Affiliation:
Leavey School of Business and Administration, Santa Clara University, Santa Clara, CA 95053.
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Abstract

We examine the cash flow signaling, overinvestment, and dividend clientele explanations for the information content of dividend change announcements. After simultaneously controlling for the standardized dividend change, dividend yield, and Tobin's Q, we find that announcement period excess returns are positively related to the magnitude of the standardized dividend change and to the dividend yield, but unrelated to Tobin's Q. We provide further evidence on the cash flow signaling and overinvestment hypotheses by examining revisions in analysts' earnings forecasts and changes in capital expenditures following dividend change announcements. We find that analysts significantly revise their earnings forecasts following dividend changes and that Q < 1 firms actually increase their capital expenditures following dividend increases and decrease them following dividend decreases. Overall, our findings support the cash flow signaling and dividend clientele hypotheses for stock price reactions to dividend change announcements, but provide little support for the overinvestment hypothesis.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 29 , Issue 4 , December 1994 , pp. 567 - 587
Copyright
Copyright © School of Business Administration, University of Washington 1994

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