IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v22y2012i17p1395-1408.html
   My bibliography  Save this article

Dividend signalling and sustainability

Author

Listed:
  • J. Hobbs
  • M. I. Schneller

Abstract

We examine the ‘disappearing dividends’ era documented by Fama and French (2001) with respect to the traditional theory of signalling, wherein the positive signal is one of high future cash flows and continued payments. We report several new findings. First, during the disappearing dividends era, dividends vanished not only because they were less frequently initiated -- the oft-cited reason -- but also because, once initiated, they were less likely to be sustained. Second, we find that although future performance does increase with dividend sustainability, performance is merely average for permanent payers and poor for temporary payers. Third, we find that the market responded favourably to initiations but did not distinguish ex-ante between short-run and long-run payers. Fourth, we find that despite the market's similar treatment of shorter- and longer-term payers, dividend sustainability was in fact predictable out of sample, using information strictly available to investors at the time of the announcement. Fifth, we find that performance is predictable through sustainability; the firms we predict to become permanent payers significantly outperform their counterparts in subsequent years. Overall, our findings run counter to the traditional signalling theory of dividends in terms of both overall firm performance and the market's reaction to initiations.

Suggested Citation

  • J. Hobbs & M. I. Schneller, 2012. "Dividend signalling and sustainability," Applied Financial Economics, Taylor & Francis Journals, vol. 22(17), pages 1395-1408, September.
  • Handle: RePEc:taf:apfiec:v:22:y:2012:i:17:p:1395-1408
    DOI: 10.1080/09603107.2012.654909
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/09603107.2012.654909
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, vol. 57(4), pages 1649-1684, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:22:y:2012:i:17:p:1395-1408. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.