The Signaling Power of Specially Designated Dividends

Michael Joseph Gombola · Feng-Ying Liu

25 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Finance and Governance Financial Markets and Investment Strategies Auditing, Earnings Management, Governance

Abstract

We distinguish among the signaling, free cash flow, and wealth transfer hypotheses in explaining the stock price reaction to specially designated dividend (SDD) announcements. In a direct test of the signaling power of SDDs, we find both a larger stock price reaction and a significant upward revision of earnings forecasts for firms with Tobin's q less than one, but not for other firms. Our results support the conditional signaling hypothesis, which predicts greater effects of favorable information for low q firms. Taken together, our results for stock price effects and earnings forecast revisions do not support either the free cash flow or wealth transfer hypotheses.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1989Free Cash Flow and Stockholder Gains in Going Private Transactions 1988Analysts' forecasts as earnings expectations 1989Managerial performance, Tobin's Q, and the gains from successful tender offers 1989Dividend announcements 1991The Relative Signalling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases 1987On cross-sectional analysis in accounting research 1994The Information Content of Dividend Changes: Cash Flow Signaling, Overinvestment, and Dividend Clienteles

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