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An Examination of the Free Cash Flow and Information/Signaling Hypotheses Using Unexpected Dividend Changes Inferred from Option and Stock Prices: The Case of Regular Dividend Increases

Author

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  • Sheng-Syan Chen

    (Department of Finance, College of Management, National Taiwan University, 85 Roosevelt Road, Section 4, 106 Taipei, Taiwan, ROC)

  • Kuei-Chin Fu

    (Department of Finance, College of Management, National Taiwan University, 85 Roosevelt Road, Section 4, 106 Taipei, Taiwan, ROC)

Abstract

This paper measures unexpected dividend changes in testing the free cash flow and information/signaling hypotheses using the Bar–Yosef/Sarig method. The empirical findings reveal the following: (i) The association between announcement period abnormal returns and the cash level is significantly positive for lowqfirms; (ii) The positive association between announcement period, abnormal returns, and the cash level is stronger in lowqthan in highqfirms for most regressions; (iii) Lowqfirms reduce their capital and research and development (R&D) expenditures during the four fiscal years following dividend increase announcements. Our results are consistent with the free cash flow hypothesis.

Suggested Citation

  • Sheng-Syan Chen & Kuei-Chin Fu, 2011. "An Examination of the Free Cash Flow and Information/Signaling Hypotheses Using Unexpected Dividend Changes Inferred from Option and Stock Prices: The Case of Regular Dividend Increases," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 14(03), pages 563-600.
    • Handle: RePEc:wsi:rpbfmp:v:14:y:2011:i:03:n:s0219091511002329
    DOI: 10.1142/S0219091511002329
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    Citations

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    Cited by:

    1. Małgorzata Snarska & Tomasz K. Wisniewski & Andrzej Zygula, 2020. "Are Emerging Markets Efficient? Evidence from Informational Content of Dividend Changes in Polish Stock Market," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 687-717.
    2. William Mingyan Cheung & Li Jiang, 2016. "Does free cash flow problem contribute to excess stock return synchronicity?," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 123-140, January.
    3. Nan-Ting Kuo, 2013. "Dividend tax signaling and the pricing of future earnings: a case of taxable stock dividends," Review of Quantitative Finance and Accounting, Springer, vol. 40(3), pages 539-570, April.
    4. Chin-Chen Chien & Cheng-Few Lee & She Chih Chiu, 2016. "Does Corporate Governance Curb Managers’ Opportunistic Behavior of Exploiting Inside Information for Early Exercise of Executive Stock Options?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(01), pages 1-22, March.
    5. William Cheung & Li Jiang, 2016. "Does free cash flow problem contribute to excess stock return synchronicity?," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 123-140, January.

    More about this item

    Keywords

    Free cash flow hypothesis; information/signaling hypothesis; regular dividend; unexpected dividend changes;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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