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Testing Dividend Signalling Models

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  • Dan Bernhardt
  • J. Fiona Robertson
  • Ray Farrow

Abstract

This paper derives a key monotonicity property common to dividend signalling models: the greater the rate that dividend income is taxed relative to capital gains income, the greater the value of information revealed by a given dividend yield, and hence the greater the associated excess return. This monotonicity condition allows us to distinguish the hypothesis that dividends are used as a signalling device from the hypothesis that dividends contain information but are not used as Spencian signals. The monotonicity conditions are tested with robust non-parametric techniques. Although we find strong evidence that dividend announcements contain information, we find no evidence to support dividend signalling. The same results are inconsistent with tax-based CAPM arguments.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_895.pdf
File Function: First version 1994
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 895.

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Length: 49 pages
Date of creation: Jan 1994
Date of revision:
Handle: RePEc:qed:wpaper:895

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Keywords: signalling; non-parametric;

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References

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  1. Michael J. Brennan & Anjan V. Thakor, 2004. "Shareholder Preferences and Dividend Policy," Finance 0411017, EconWPA.
  2. Keim, Donald B., 1983. "Size-related anomalies and stock return seasonality : Further empirical evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 13-32, June.
  3. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
  4. Pettit, R Richardson, 1972. "Dividend Announcements, Security Performance, and Capital Market Efficiency," Journal of Finance, American Finance Association, vol. 27(5), pages 993-1007, December.
  5. Litzenberger, Robert H. & Ramaswamy, Krishna, 1979. "The effect of personal taxes and dividends on capital asset prices : Theory and empirical evidence," Journal of Financial Economics, Elsevier, vol. 7(2), pages 163-195, June.
  6. Laub, P Michael, 1976. "On the Informational Content of Dividends," The Journal of Business, University of Chicago Press, vol. 49(1), pages 73-80, January.
  7. Allen, Franklin & Michaely, Roni, 2003. "Payout policy," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429 Elsevier.
  8. Praveen Kumar, 1988. "Shareholder-Manager Conflict and the Information Content of Dividends," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 111-136.
  9. Charest, Guy, 1978. "Dividend information, stock returns and market efficiency-II," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 297-330.
  10. Asquith, Paul & Mullins, David W, Jr, 1983. "The Impact of Initiating Dividend Payments on Shareholders' Wealth," The Journal of Business, University of Chicago Press, vol. 56(1), pages 77-96, January.
  11. Amihud, Yakov & Murgia, Maurizio, 1997. " Dividends, Taxes, and Signaling: Evidence from Germany," Journal of Finance, American Finance Association, vol. 52(1), pages 397-408, March.
  12. Eades, Kenneth M. & Hess, Patrick J. & Kim, E. Han, 1984. "On interpreting security returns during the ex-dividend period," Journal of Financial Economics, Elsevier, vol. 13(1), pages 3-34, March.
  13. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  14. Shefrin, Hersh M. & Statman, Meir, 1984. "Explaining investor preference for cash dividends," Journal of Financial Economics, Elsevier, vol. 13(2), pages 253-282, June.
  15. Christie, William G., 1994. "Are Dividend Omissions Truly the Cruelest Cut of All?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(03), pages 459-480, September.
  16. Robert B. Avery & Gregory E. Elliehausen, 1986. "Financial characteristics of high-income families," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Mar, pages 163-177.
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Citations

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Cited by:
  1. Raj Chetty & Joseph Rosenberg & Emmanuel Saez, 2005. "The Effects of Taxes on Market Responses to Dividend Announcements and Payments: What Can we Learn from the 2003 Dividend Tax Cut?," NBER Working Papers 11452, National Bureau of Economic Research, Inc.
  2. Chetty, Raj & Saez, Emmanuel, 2004. "Dividend Taxes and Corporate Behaviour: Evidence from the 2003 Dividend Tax Cut," CEPR Discussion Papers 4722, C.E.P.R. Discussion Papers.
  3. Tobias Basse & Sebastian Reddemann, 2011. "Inflation and the dividend policy of US firms," Managerial Finance, Emerald Group Publishing, vol. 37(1), pages 34-46, January.
  4. Kao, Lanfeng & Chen, Anlin, 2013. "How product market competition affects dividend payments in a weak investor protection economy: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 21-39.
  5. Blau, Benjamin M. & Fuller, Kathleen P. & Van Ness, Robert A., 2011. "Short selling around dividend announcements and ex-dividend days," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 628-639, June.
  6. Kuo, Nan-Ting & Lee, Cheng-Few, 2013. "Effects of dividend tax and signaling on firm valuation: Evidence from taxable stock dividend announcements," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 157-180.

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