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Overinvestment, corporate governance, and dividend initiations

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  • Officer, Micah S.
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    Abstract

    Firms with low Tobin's Q and high cash flow have significantly more positive dividend initiation announcement returns than do other firms. I interpret this result as consistent with the hypothesis that reductions in the agency costs of overinvestment at firms with poor investment opportunities and ample cash flow are reflected in higher dividend initiation announcement returns. Further tests, such as examining the impact of governance metrics on initiation announcement returns following the dividend tax cut of 2003 and examining the long-run cash-retention policies of dividend-initiating firms, are consistent with this interpretation. There is also some evidence that is consistent with the cash flow signaling hypothesis, as dividend-initiating firms with low Tobin's Q and low pre-initiation cash flow experience substantial revisions in analysts' earnings forecasts and significantly positive initiation announcement returns.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 17 (2011)
    Issue (Month): 3 (June)
    Pages: 710-724

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    Handle: RePEc:eee:corfin:v:17:y:2011:i:3:p:710-724

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Dividend initiations Agency costs Corporate governance;

    References

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    Cited by:
    1. Krieger, Kevin & Lee, Bong-Soo & Mauck, Nathan, 2013. "Do senior citizens prefer dividends? Local clienteles vs. firm characteristics," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 150-165.
    2. Ye, Dezhu & Liu, Shasha & Kong, Dongmin, 2013. "Do efforts on energy saving enhance firm values? Evidence from China's stock market," Energy Economics, Elsevier, vol. 40(C), pages 360-369.
    3. Denis, David J., 2011. "Financial flexibility and corporate liquidity," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 667-674, June.
    4. Alzahrani, Mohammed & Lasfer, Meziane, 2012. "Investor protection, taxation, and dividends," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 745-762.

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