Working Paper: CEPR ID: DP14174
Authors: Stefano Rossi; Michael Weber; Roni Michaely
Abstract: Contrary to signaling models' central predictions, changes in the level of cash flows do not empirically follow changes in dividends. We use the Campbell (1991) decomposition to construct cash-flow and discount-rate news from returns and find the following: (1) Both dividend changes and repurchase announcements signal changes in cash-flow volatility (in opposite direction); (2) larger cash-flow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-flow news, nor total stock return volatility change following dividend changes. We conclude cash-flow news--and not discount-rate news--drive payout policy, and payout policy conveys information about future cash-flow volatility.
Keywords: dividends; payout policy; cashflow volatility; signaling model
JEL Codes: G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dividend increases (G35) | Decrease in cash flow volatility (G19) |
| Dividend cuts (G35) | Increase in cash flow volatility (G19) |
| Dividend changes (G35) | Changes in cash flow volatility (G19) |
| Larger dividend changes (G35) | Larger cumulative abnormal returns (G14) |
| Dividend announcements (G35) | No significant change in cash flow news (G39) |
| Dividend announcements (G35) | No significant change in discount rate news (E43) |