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Dividends as Reference Points: A Behavioral Signaling Approach

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  • Malcolm Baker
  • Brock Mendel
  • Jeffrey Wurgler

Abstract

We outline a dividend signaling model that features investors who are averse to dividend cuts. Managers with strong unobservable cash earnings pay high dividends but retain enough to be likely not to fall short next period. The model is consistent with a Lintner partial-adjustment model, modal dividend changes of zero, stronger market reactions to dividend cuts than increases, comparatively infrequent and irregular repurchases, and a mechanism that does not depend on public destruction of value, which managers reject in surveys. New tests involve stronger reactions to changes from longer-maintained dividend levels and reference point currencies of American Depository Receipt dividends. Received July 16, 2012; accepted September 15, 2015 by Editor David Hirshleifer.

Suggested Citation

  • Malcolm Baker & Brock Mendel & Jeffrey Wurgler, 2016. "Dividends as Reference Points: A Behavioral Signaling Approach," The Review of Financial Studies, Society for Financial Studies, vol. 29(3), pages 697-738.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:3:p:697-738.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhv058
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    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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