What insight do market participants gain from dividend increases?

This study examines the reactions of market makers and investors to large dividend increases to identify the motives for dividend increases. Uniquely, this study simultaneously tests the signaling and agency abatement motivations as explanations of the impact of dividend increases on stock prices and bid-ask spreads. The agency abatement hypothesis argues that increased dividends constrict management's future behavior, abating the agency problem with shareholders. The signaling hypothesis asserts that dividend increases signal that managers expect higher or more stable cash flows in the future. Mean stock price responses to dividend increase announcements during 1995 are examined over both short ( _1, 0) and long ( _1, 504) windows. Changes in bid-ask spreads are examined over a short ( _1, 0) window and an intermediate (81 day) period. This study partitions dividend increases into a sample motivated by agency abatement and a sample motivated by cash flow signaling. Further, this study examines the agency abatement and cash flow signaling explanations of relative bid-ask spread responses to announcements of dividend increases. Estimated generalized least squares models of market reactions to sampled events support the agency abatement hypothesis over the cash flow signaling hypothesis as a motive for large dividend increases as measured by Tobin's Q and changes in the distribution of cash flows.

Grantor dc:publisher

University of North Texas

Year dc:date

2000

Author dc:creator

• Ellis, R. Barry

Contributors dc:contributor

• Conover, James
• Tripathy, Niranjan
• Conover, Teresa L.
• Siddiqi, Mazhar

• Stock exchanges.
• Stockholders.
• Dividends.
• stock market
• signaling hypothesis
• agency abatement hypothesis
• dividend increases

Statement dc:rights

• Public
• Copyright
• Ellis, R. Barry
• Copyright is held by the author, unless otherwise noted. All rights reserved.

Language dc:language

English

Identifier

oclc: 47163434
untcat: b2300393
https://digital.library.unt.edu/ark:/67531/metadc2536/
ark: ark:/67531/metadc2536

OAI identifier oai:identifier

info:ark/67531/metadc2536