Dividends: Relevance, rigidity, and signaling

Sigitas Karpavičius

Journal of Corporate Finance, 2014, vol. 25, issue C, 289-312

Abstract: This paper uses a dynamic partial equilibrium model to explain a puzzle of dividend smoothing. In contrast to the Modigliani–Miller theory, I show that firm value depends on payout policy. The analysis implies that firms with more stable dividend stream are more valuable. This explains why dividends are rigid over time. A volatile component of dividends is introduced to reduce the likelihood of dividend omission in bad times while keeping the same historical average dividends. I show that the empirically observed positive relation between dividends and future firm performance is a statistical artifact driven by dividend smoothing. Thus, the empirical tests of dividend signaling theory might be misspecified.

Keywords: Dividend smoothing; Payout policy; Signaling theory; Partial equilibrium model (search for similar items in EconPapers)
JEL-codes: D21 D58 G35 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:25:y:2014:i:c:p:289-312

DOI: 10.1016/j.jcorpfin.2013.12.014

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