Signaling, Free Cash Flow and "Nonmonotonic" Dividends
AbstractMany argue that dividends signal future earnings or dispose of excess cash. Empirical support is inconclusive, potentially because no model combines both rationales. This paper does. Higher quality firms pay dividends to eliminate the free cash-flow problem, while firms that outsiders perceive as lower quality pay dividends to signal future earnings and reduce the free cash-flow problem. In equilibrium, dividends are nonmonotonic with respect to the signal observed by outsiders; the highest quality firms pay smaller dividends than lower perceived quality firms. The model reconciles the existing literature and generates new empirical predictions that are tested and supported. Copyright (c) 2010, The Eastern Finance Association.
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Bibliographic InfoArticle provided by Eastern Finance Association in its journal Financial Review.
Volume (Year): 45 (2010)
Issue (Month): 1 (02)
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- Richard Fairchild, 2010. "Dividend policy, signalling and free cash flow: an integrated approach," Managerial Finance, Emerald Group Publishing, vol. 36(5), pages 394-413, May.
- Jeffrey Jones & Jenny Gu & Pu Liu, 2014. "Do dividend initiations signal a reduction in risk? Evidence from the option market," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 143-158, January.
- Negrea Laura Georgeta & Matis Dumitru & Mustata V. Razvan, 2011. "Free Cash Flow As Part Of Voluntary Reporting. Literature Review," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 591-596, December.
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