Working Paper: NBER ID: w24237
Authors: Roni Michaely; Stefano Rossi; Michael Weber
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; Cash Flow Volatility; Corporate Finance
JEL Codes: G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dividend changes (G35) | Future cash flow volatility (G17) |
| Dividend increases (G35) | Cash flow volatility (G19) |
| Dividend cuts (G35) | Cash flow volatility (G19) |
| Larger dividend announcements (G35) | Larger changes in cash flow volatility (G19) |
| Dividend initiations (G35) | Cash flow volatility (G19) |
| Dividend omissions (G35) | Cash flow volatility (G19) |
| Dividend changes (G35) | Cash flow news (G19) |
| Discount rate news does not drive corporate dividend policies (G35) | Corporate dividend policies (G35) |