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Corporate Financial Policy, Information, and Market Expectations: An Empirical Investigation of Dividends

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  • Ofer, Aharon R
  • Siegel, Daniel R

Abstract

This paper documents a relationship between announcements of unexpected changes in financial policy and unexpec ted changes in performance of the firm. Using a new methodology that combines analysis of stock price movements and earnings forecast data the authors provide evidence that analysts revise their earnings fo recasts rationally following the announcement of an unexpected divide nd change by an amount positively related to the size of both the une xpected dividend change and the change in equity value surrounding th e announcement. The results provide direct evidence consistent with t he hypothesis that unexpected dividend changes signal information abo ut firm performance to market participants. Copyright 1987 by American Finance Association.

Suggested Citation

  • Ofer, Aharon R & Siegel, Daniel R, 1987. " Corporate Financial Policy, Information, and Market Expectations: An Empirical Investigation of Dividends," Journal of Finance, American Finance Association, vol. 42(4), pages 889-911, September.
  • Handle: RePEc:bla:jfinan:v:42:y:1987:i:4:p:889-911
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    References listed on IDEAS

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    1. Flavin, Marjorie A, 1983. "Excess Volatility in the Financial Markets: A Reassessment of the Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 929-956, December.
    2. Singleton, Kenneth J, 1980. "Expectations Models of the Term Structure and Implied Variance Bounds," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1159-1176, December.
    3. Michener, Ronald W, 1982. "Variance Bounds in a Simple Model of Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 166-175, February.
    4. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-574, May.
    5. Lawrence H. Summers, 1982. "Do We Really Know That Financial Markets Are Efficient?," NBER Working Papers 0994, National Bureau of Economic Research, Inc.
    6. Jeffrey A. Frankel & James H. Stock, 1983. "A Relationship Between Regression Tests and Volatility Tests of Market ncy," NBER Working Papers 1105, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Eva Liljeblom & Sabur Mollah & Patrik Rotter, 2015. "Do dividends signal future earnings in the Nordic stock markets?," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 493-511, April.
    2. Chen, Fan, 2016. "The wealth effects of dividend announcements on bondholders: New evidence from the over-the-counter market," Journal of Economics and Business, Elsevier, vol. 86(C), pages 52-75.
    3. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    4. Herman Manakyan & Carolyn Carroll, 1990. "An Empirical Examination Of The Existence Of A Signaling Value Function For Dividends," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(3), pages 201-210, September.
    5. Jung-Hua Hung & Yi-Pei Chen, 2010. "Equity Undervaluation and Signaling Power of Share Repurchases with Legal Restrictions," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(2), pages 101-115, March.
    6. Healy, Paul M. & Palepu, Krishna G., 1995. "The challenges of investor communication The case of CUC International, Inc," Journal of Financial Economics, Elsevier, vol. 38(2), pages 111-140, June.
    7. Christine Jolls, 1998. "Stock Repurchases and Incentive Compensation," NBER Working Papers 6467, National Bureau of Economic Research, Inc.
    8. Andres, Christian & Cumming, Douglas & Karabiber, Timur & Schweizer, Denis, 2014. "Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 133-156.
    9. Goergen, Marc & Renneboog, Luc & Correia da Silva, Luis, 2005. "When do German firms change their dividends?," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 375-399, March.
    10. S. Wong & Q. Wei & K. Chau, 2014. "IPO Location as a Quality Signal: The Case of Chinese Developers," The Journal of Real Estate Finance and Economics, Springer, vol. 49(4), pages 551-567, November.
    11. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
    12. Jan Bena & Jan Hanousek, 2008. "Rent Extraction by Large Shareholders: Evidence Using Dividend Policy in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(03-04), pages 106-130, May.
    13. Chung, Kee H. & Wright, Peter & Charoenwong, Charlie, 1998. "Investment opportunities and market reaction to capital expenditure decisions," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 41-60, January.
    14. Lawrence Peter King, 1999. "The Developmental Consequences of Foreign Direct Investment in the Transition from Socialism to Capitalism: The Performance of Foreign Owned Firms in Hungary," William Davidson Institute Working Papers Series 277, William Davidson Institute at the University of Michigan.
    15. Hamdi Ben-Nasr, 2015. "Government Ownership and Dividend Policy: Evidence from Newly Privatised Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(5-6), pages 665-704, June.
    16. Andres, Christian & Hofbaur, Ulrich, 2017. "Do what you did four quarters ago: Trends and implications of quarterly dividends," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 139-158.
    17. Bernheim, B Douglas & Wantz, Adam, 1995. "A Tax-Based Test of the Dividend Signaling Hypothesis," American Economic Review, American Economic Association, vol. 85(3), pages 532-551, June.
    18. Sophie Manigart & Koen De Waele, 1999. "Choice dividends and contemporaneous earnings announcements on a small stock market: an empirical study," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 161, pages 27-56.
    19. Jung-Hua Hung & Yi-Pei Chen, 2010. "Equity Undervaluation and Signaling Power of Share Repurchases with Legal Restrictions," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(2), pages 101-115, March.
    20. Renneboog, Luc, 2000. "Ownership, managerial control and the governance of companies listed on the Brussels stock exchange," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1959-1995, December.
    21. Linda S. Klein & David R. Peterson, 1989. "Earnings Forecast Revisions Associated With Stock Split Announcements," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(4), pages 319-328, December.

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