Skip to main content Accessibility help
×
Home

The Dividend Initiation Decision of Newly Public Firms: Some Evidence on Signaling with Dividends

  • Jayant R. Kale (a1), Omesh Kini (a2) and Janet D. Payne (a3)

Abstract

We track the dividend initiation (DI) decisions from a sample of 6,588 firms that went public during the period 1979–2005 and find that 873 of them initiated dividends. Our primary objective is to determine whether information signaling can explain the DI decision. We find that variables suggested by the dividend-signaling models of John and Williams (1985) and Allen, Bernardo, and Welch (2000) are significant determinants of the DI decision and the associated announcement-period stock price effect. We also find support for the residual, agency, tax, clientele, transaction costs, catering, and life-cycle explanations of dividend policy.

Copyright

References

Hide All
Aharony, J., and Swary, I.. “Quarterly Dividend and Earnings Announcements and Stockholders’ Return: An Empirical Analysis.” Journal of Finance, 35 (1980), 112.
Allen, F.; Bernardo, A. E.; and Welch, I.. “A Theory of Dividends Based on Tax Clienteles.” Journal of Finance, 55 (2000), 24992536.
Allen, F., and Faulhaber, G. R.. “Signaling by Underpricing in the IPO Market.” Journal of Financial Economics, 23 (1989), 303323.
Asquith, P., and Mullins, D. W. Jr.The Impact of Initiating Dividend Payments on Shareholders’ Wealth.” Journal of Business, 56 (1983), 7796.
Badrinath, S. G.; Gay, G. D.; and Kale, J. R.. “Patterns of Institutional Investments, Prudence, and the Managerial ‘Safety-Net’ Hypothesis.” Journal of Risk and Insurance, 56 (1989), 605629.
Baker, M., and Wurgler, J.. “A Catering Theory of Dividends.” Journal of Finance, 59 (2004), 11251165.
Banerjee, S.; Gatchev, V. A.; and Spindt, P. A.. “Stock Market Liquidity and Firm Dividend Policy.” Journal of Financial and Quantitative Analysis, 42 (2007), 369398.
Benartzi, S.; Michaely, R.; and Thaler, R.. “Do Changes in Dividends Signal the Future or the Past?Journal of Finance, 52 (1997), 10071034.
Bhattacharya, S.Imperfect Information, Dividend Policy, and ‘The Bird in the Hand’ Fallacy.” Bell Journal of Economics, 10 (1979), 259270.
Brav, A.; Graham, J. R.; Harvey, C. R.; and Michaely, R.. “Payout Policy in the 21st Century.” Journal of Financial Economics, 77 (2005), 483527.
Carter, R. B.; Dark, F. H.; and Singh, A. K.. “Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks.” Journal of Finance, 53 (1998), 285311.
Carter, R., and Manaster, S.. “Initial Public Offering and Underwriter Reputation.” Journal of Finance, 45 (1990), 10451067.
Cox, D. R. “Regression Models and Life-Tables.” Journal of the Royal Statistical Society, 34 (1972), 187220.
DeAngelo, H.; DeAngelo, L.; and Skinner, D. J.. “Special Dividends and the Evolution of Dividend Signaling.” Journal of Financial Economics, 57 (2000), 309354.
DeAngelo, H.; DeAngelo, L.; and Skinner, D. J.. “Corporate Payout Policy.” Foundations and Trends in Finance, 3 (2008), 95287.
DeAngelo, H.; DeAngelo, L.; and Stulz, R. M.. “Dividend Policy and the Earned/Contributed Capital Mix: A Test of the Life-Cycle Theory.” Journal of Financial Economics, 81 (2006), 227254.
Del Guercio, D.The Distortion Effect of Prudent-Man Laws on Institutional Equity Investments.” Journal of Financial Economics, 40 (1996), 3162.
Dyl, E. A., and Weigand, R. A.. “The Information Content of Dividend Initiations: Additional Evidence.” Financial Management, 27 (1998), 2735.
Eades, K. M. “Empirical Evidence on Dividends as a Signal of Firm Value.” Journal of Financial and Quantitative Analysis, 17 (1982), 471500.
Eckbo, E., and Masulis, R.. “Seasoned Equity Offerings: A Survey.” In Finance (North-Holland Series of Handbooks in Operations Research and Management Science), Jarrow, R., Maksimovic, V., and Ziemba, W., eds. North Holland (1995).
Fama, E. F., and French, K. R.. “Multifactor Explanations of Asset Pricing Anomalies.” Journal of Finance, 51 (1996), 5584.
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153193.
Fama, E. F., and French, K. R.. “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?Journal of Financial Economics, 60 (2001), 343.
Greene, W. H. Econometric Analysis. Upper Saddle River, NJ: Prentice Hall (2007).
Grinblatt, M., and Hwang, C. Y.. “Signaling and the Pricing of New Issues.” Journal of Finance, 44 (1989), 393420.
Grullon, G., and Michaely, R.. “Dividends, Share Repurchases, and the Substitution Hypothesis.” Journal of Finance, 57 (2002), 16491684.
Grullon, G.; Michaely, R.; and Swaminathan, B.. “Are Dividend Changes a Sign of Firm Maturity.” Journal of Business, 75 (2002), 387424.
Healy, P. M., and Palepu, K. G.. “Earnings Information Conveyed by Dividend Initiations and Omissions.” Journal of Financial Economics, 21 (1988), 149175.
Heckman, J. J. “Sample Selection Bias as a Specification Error.” Econometrica, 47 (1979), 153161.
Huber, P. “The Behavior of Maximum Likelihood Estimates under Nonstandard Conditions.” In Procedures of the Fifth Annual Berkeley Symposium on Mathematical Statistics and Probability, Vol. 1, LeCam, L. and Neyman, J., eds. Berkeley, CA: University of California Press (1967).
Jagannathan, M.; Stephens, C. P.; and Weisbach, M. S.. “Financial Flexibility and the Choice between Dividends and Stock Repurchases.” Journal of Financial Economics, 57 (2000), 355384.
Jensen, M. C. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323329.
John, K., and Williams, J.. “Dividends, Dilution, and Taxes: A Signalling Equilibrium.” Journal of Finance, 40 (1985), 10531070.
Kalay, A.Signaling, Information Content, and the Reluctance to Cut Dividends.” Journal of Financial and Quantitative Analysis, 15 (1980), 855869.
Kalbfleisch, J. D., and Prentice, R. L.. The Statistical Analysis of Failure Time Data. New York, NY: Wiley (1980).
Kale, J. R., and Noe, T. H.. “Dividends, Uncertainty, and Underwriting Costs under Asymmetric Information.” Journal of Financial Research, 4 (1990), 265277.
Kaplan, S. N., and Zingales, L.. “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financial Constraints?Quarterly Journal of Economics, 112 (1997), 169215.
Lang, L. H. P., and Litzenberger, R. H.. “Dividend Announcements: Cash Flow Signaling vs. Free Cash Flow Hypothesis?Journal of Financial Economics, 24 (1989), 181191.
Lintner, J.Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes.” American Economic Review, 46 (1956), 97113.
Lipson, M. L.; Maquieira, C. P.; and Megginson, W.. “Dividend Initiations and Earnings Surprises.” Financial Management, 27 (1998), 3645.
Loughran, T., and Ritter, J.. “Why Has IPO Underpricing Changed over Time?Financial Management, 33 (2004), 537.
McDonald, J. F., and Moffitt, R. A.. “The Uses of Tobit Analysis.” Review of Economics and Statistics, 62 (1980), 318321.
Miller, M. “The Information Content of Dividends.” In Macroeconomics and Finance: Essay in Honor of Franco Modigliani, Dornbusch, R. and Fischer, S., eds. Cambridge, MA: MIT Press (1987).
Miller, M. H., and Modigliani, F.. “Dividend Policy, Growth, and the Valuation of Shares.” Journal of Business, 34 (1961), 411433.
Miller, M. H., and Rock, K.. “Dividend Policy under Asymmetric Information.” Journal of Finance, 40 (1985), 10211051.
Pettit, R. R. “Dividend Announcements, Security Performance, and Capital Market Efficiency.” Journal of Finance, 27 (1972), 9931007.
Rogers, W.Regression Standard Errors in Clustered Samples.” Stata Technical Bulletin, 13 (1993), 1923.
Ross, S. A.; Westerfield, R.; and Jaffe, J.. Corporate Finance. New York, NY: McGraw-Hill Irwin (2005).
Rozeff, M. S. “Growth, Beta and Agency Costs as Determinants of Dividend Payout Ratios.” Journal of Financial Research, 5 (1982), 249259.
Shumway, T.Forecasting Bankruptcy More Accurately: A Simple Hazard Model.” Journal of Business, 74 (2001), 101124.
Smith, C. W. Jr., and Watts, R. L.. “The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Financial Economics, 32 (1992), 263292.
Venkatesh, P. C. “The Impact of Dividend Initiation on the Information Content of Earnings Announcements and Returns Volatility.” Journal of Business, 62 (1989), 175197.
Warner, J. B.; Watts, R. L.; and Wruck, K. H.. “Stock Prices and Top Management Changes.” Journal of Financial Economics, 20 (1988), 461492.
Weisbach, M. S. “Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 431460.
Welch, I.Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings.” Journal of Finance, 44 (1989), 421449.
White, H.A Heteroskedasticity-Consistent Covariance Matrix and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817838.
Wooldridge, J. M. Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: MIT Press (2002).
Yoon, P. S., and Starks, L. T.. “Signaling, Investment Opportunities, and Dividend Announcements.” Review of Financial Studies, 8 (1995), 9951018.

The Dividend Initiation Decision of Newly Public Firms: Some Evidence on Signaling with Dividends

  • Jayant R. Kale (a1), Omesh Kini (a2) and Janet D. Payne (a3)

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed