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Dividends as Reference Points: A Behavioral Signaling Approach

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  • Malcolm Baker
  • Jeffrey Wurgler

Abstract

We outline a dividend signaling approach in which rational managers signal firm strength to investors who are loss averse to reductions in dividends relative to the reference point set by prior dividends. Managers with strong but unobservable cash earnings separate themselves by paying high dividends but retain enough earnings to be likely not to fall short of the same level next period. The model is consistent with several features of the data, including equilibrium dividend policies similar to a Lintner partial-adjustment model; modal dividend changes of zero; stronger market reactions to dividend cuts than increases; relative infrequency and irregularity of repurchases versus dividends; and a core mechanism that does not center on public destruction of value, a notion that managers reject in surveys. Supportive new tests involve nominal levels and changes of dividends per share, announcement effects, and reference point currencies of ADR dividends.

Suggested Citation

  • Malcolm Baker & Jeffrey Wurgler, 2012. "Dividends as Reference Points: A Behavioral Signaling Approach," NBER Working Papers 18242, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18242
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    Cited by:

    1. Narcis Tulbure, 2015. "Choice In Context: Rationality, Contingency And Risk In The Dividend Policy," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 388-395.
    2. Floyd, Eric & Li, Nan & Skinner, Douglas J., 2015. "Payout policy through the financial crisis: The growth of repurchases and the resilience of dividends," Journal of Financial Economics, Elsevier, vol. 118(2), pages 299-316.
    3. Wei Jiang & Meiting Lu & Yaowen Shan & Tingting Zhu, 2016. "Evidence of Avoiding Working Capital Deficits in Australia," Australian Accounting Review, CPA Australia, vol. 26(1), pages 107-118, March.
    4. Roni Michaely & Stefano Rossi & Michael Weber, 2017. "The Information Content of Dividends: Safer Profits, Not Higher Profits," CESifo Working Paper Series 6751, CESifo Group Munich.
    5. Scott Walker, 2015. "Repeated Dividend Increases: A Collection of Four Essays," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 17.
    6. Michele Fabrizi & Elisabetta Ipino & Michel Magnan & Antonio Parbonetti, 2016. "Real Regulatory Capital Management and Dividend Payout: Evidence from Available-for-Sale Securities / Gestion du capital réglementaire et politique de dividende : Le cas des valeurs mobilières disponi," CIRANO Working Papers 2016s-57, CIRANO.
    7. Shapiro, Dmitry & Zhuang, Anan, 2015. "Dividends as a signaling device and the disappearing dividend puzzle," Journal of Economics and Business, Elsevier, vol. 79(C), pages 62-81.
    8. Jeffrey J. Coulton & Caitlin M. S. Ruddock & Stephen L. Taylor, 2014. "The Informativeness of Dividends and Associated Tax Credits," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(9-10), pages 1309-1336, November.
    9. Andres, Christian & Hofbaur, Ulrich, 2017. "Do what you did four quarters ago: Trends and implications of quarterly dividends," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 139-158.

    More about this item

    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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