Do dividends and share repurchases convey information about financial strength? An exploration of the disparities between banks and industrial firms

Differing from prior literature, this article suggests dividends are positively associated with financial strength for both financial institutions (i.e., banks) and non‐financial firms (i.e., industrials), and that this relationship is much more pronounced for banks. We also find that the signaling impacts of dividend changes on financial strength are asymmetric for these two groups as a decrease (increase) in dividends is more powerful than an increase (decrease) for banks (industrials). This suggests that dividend cuts send a more significant negative signal of bank financial strength than similar decreases by industrial firms, and that dividend increases say more about industrials' improvements in financial strength than those by banks. Similar to dividends, share repurchases are indications of financial strength for industrials but not for banks. This suggests that share repurchases serve more as a buffer (substitute) of dividends for banks (industrials).