Shapiro, Dmitry and Zhuang, Anan, Dividends as Signaling Device and the Disappearing Dividend Puzzle (March 14, 2013). Available at SSRN
“In the paper we provide an extension of the Baker and Wurgler (2012) model where managers use dividends to signal firms earning to investors. We introduce heterogeneity among investors and firms; we also introduce investors’ choice of firms based on their preferences. In this setting we study which firms characteristics make it more likely that a firm pays positive dividends. We show that firms with higher future returns and higher volatility of future returns are less likely to pay dividends. However, those firms that do pay, pay out more. We also show that firms whose managers have higher share of stock options are less likely to pay dividends. Finally, there is a clientele effect in that investors preferences impact the dividend policy. If firms investors are less sensitive to dividend cuts, for example, due to a larger presence of active institutional investors, then this firm is less likely to pay dividends.”
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