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Dividend Payout and the Valuation Effects of Bond Announcements

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  • Johnson, Shane A.

Abstract

Recent theoretical models suggest debt and dividends can serve as substitute free cash flow control or signaling devices. I examine share price responses to announcements of straight debt issues and test whether there are systematic differences between low and high dividend payout firms. Share price response is significantly positive for low growth-low dividend payout firms, and is negatively related to cross-sectional dividend payout. The results support arguments that debt and dividends are substitutes. The results also support arguments that debt provides free cash flow or signaling benefits, but suggest the benefits are significant only for firms with low levels of substitutes. I also document that low growth-low dividend payout firms enter capital markets less frequently, but find no relation between share price response and this frequency.

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  • Johnson, Shane A., 1995. "Dividend Payout and the Valuation Effects of Bond Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(3), pages 407-423, September.
    • Handle: RePEc:cup:jfinqa:v:30:y:1995:i:03:p:407-423_00
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    Cited by:

    1. Caporale, Guglielmo Maria & Kang, Woo-Young, 2021. "On the preferences of CoCo bond buyers and sellers," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    2. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    3. Azhagaiah Ramachandran & Veeramuthu Packkirisamy, 2010. "The Impact of Firm Size on Dividend Behaviour: A Study With Reference to Corporate Firms across Industries in India," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 8(1), pages 049-078.
    4. Shawn D. Howton & Shelly W. Howton & Steven B. Perfect, 1998. "The Market Reaction To Straight Debt Issues: The Effects Of Free Cash Flow," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(2), pages 219-228, June.
    5. Ronny Manos, 2003. "Dividend Policy and Agency Theory: Evidence from Indian Firms," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 4(2), pages 275-300, September.
    6. du Jardin, Philippe & Séverin, Eric, 2011. "Dividend policy," MPRA Paper 44382, University Library of Munich, Germany.
    7. Fitriya Fauzi & Dani Foo & Abdul Basyith, 2017. "Islamic Bond Announcement: Is There Any Effect on Returns?," Global Business Review, International Management Institute, vol. 18(2), pages 327-347, April.
    8. Marshall, Andrew & McCann, Laura & McColgan, Patrick, 2019. "The market reaction to debt announcements: UK evidence surrounding the global financial crisis," The British Accounting Review, Elsevier, vol. 51(1), pages 92-109.
    9. Bogdan Stacescu, 2006. "Dividend Policy in Switzerland," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(2), pages 153-183, June.
    10. Monique Calvi-Reveyron, 1999. "Risque de surinvestissement, signalisation et annonce du dividende:le cas français," Revue Finance Contrôle Stratégie, revues.org, vol. 2(3), pages 115-145, September.
    11. Paul-Olivier KLEIN, 2017. "Do Shareholders Value Bond Offerings? A Meta-Analysis," Working Papers of LaRGE Research Center 2017-04, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.

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