Payout policy, signalling, and firm value

Abstract

One major issue in studying payout policy concerns the information implicit in payout announcements. It is becoming increasingly difficult to ignore why the firms make substantial cash distributions by dividends or share repurchases under the scenario of information asymmetry. Of particular interest, this thesis aims to clarify 1) whether the wealth effect of dividend announcements exists while earnings and dividends are announced simultaneously, 2) whether current or future earnings are the information conveyed by dividend announcements, and 3) whether share repurchase announcements signal, and if they do, whether they signal the same information as dividend announcements. The evidence of this thesis suggests that dividend effect exists even when dividend and earnings are announced simultaneously. Dividend changes appear to play a confirmative role for the earnings increase announcements which alone are not reliable enough to earn investors' trust. By comparison, earnings decline announcements per se are informative for investors and possess prominent effect on the market reactions. Moreover, the evidence, after controlling mean reversion and autocorrelation in earnings process, shows that current but not future earnings changes are the information which dividend changes convey. When making dividend decisions, managers are also found to take account of current rather than future earnings performance. With respect to share repurchase announcements, the evidence indicates that share repurchase announcements signal good news to the market and are likely made after a long-term drop in share prices. More specifically, comparing the managerial motives for different payout decisions reveals that share repurchase announcements mainly signal for the undervaluation of the firm value while dividends are announced to signal for the firms' superior operating performance.