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Tests of Dividend Signaling Using the Marsh-Merton Model: A Generalized Friction Approach

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  • Kao, Chihwa
  • Wu, Chunchi

Abstract

This article extends the Marsh-Merton (1987) model to test the information effects of dividends. A generalized friction method provides for more reliable estimates of the relationship between dividends and the firm's permanent earnings by resolving the estimation problems caused by the dividend 'stickiness.' Results show that dividend changes not only signal significant changes in the firm's future earnings prospects but also reflect the well-known practice of dividend smoothing. After resolving the estimation problem, a positive relation between unexpected changes in dividends and permanent earnings is found, and this relation appears to be correlated with certain firm attributes. Copyright 1994 by University of Chicago Press.

Suggested Citation

  • Kao, Chihwa & Wu, Chunchi, 1994. "Tests of Dividend Signaling Using the Marsh-Merton Model: A Generalized Friction Approach," The Journal of Business, University of Chicago Press, vol. 67(1), pages 45-68, January.
  • Handle: RePEc:ucp:jnlbus:v:67:y:1994:i:1:p:45-68
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    Citations

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    Cited by:

    1. Chen, Chung & Wu, Chunchi, 1999. "The dynamics of dividends, earnings and prices: evidence and implications for dividend smoothing and signaling," Journal of Empirical Finance, Elsevier, vol. 6(1), pages 29-58, January.
    2. G├╝rtler, Marc & Hartmann, Nora, 2003. "Behavioral dividend policy," Working Papers FW04V1, Technische Universit├Ąt Braunschweig, Institute of Finance.
    3. Mouna Ben rejeb attia & Houda Sassi & Naima Lassoued, 2013. "Signaling over income smoothing and IFRS adoption by banks: a panel data analysis on MENA countries," Economics Bulletin, AccessEcon, vol. 33(3), pages 2340-2356.
    4. Harada, Kimie & Nguyen, Pascal, 2005. "Dividend change context and signaling efficiency in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 13(5), pages 504-522, November.
    5. Samih Antoine Azar, 2012. "Determinants of Cyclical Aggregate Dividend Behavior," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 71-78, August.
    6. Wu, Chunchi & Hsu, Junming, 1996. "The Impact of the 1986 Tax Reform on Ex-Dividend Day Volume and Price Behavior," National Tax Journal, National Tax Association, vol. 49(2), pages 177-92, June.
    7. Robert A. Weigand & H. Kent Baker, 2009. "Changing perspectives on distribution policy: The evolution from dividends to share repurchase," Managerial Finance, Emerald Group Publishing, vol. 35(6), pages 479-492, May.
    8. Wu, Chunchi & Hsu, Junming, 1996. "The Impact of the 1986 Tax Reform on Ex-Dividend Day Volume and Price Behavior," National Tax Journal, National Tax Association;National Tax Journal, vol. 49(2), pages 177-192, June.
    9. Wu, Chunchi, 1996. "Taxes and dividend policy," International Review of Economics & Finance, Elsevier, vol. 5(3), pages 291-305.
    10. P. J. Engelen, 2006. "An Economic Analysis of the Bekaert NV Insider Trading Case," Working Papers 06-04, Utrecht School of Economics.

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