An Examination of the Free Cash Flow and Information/Signaling Hypotheses Using Unexpected Dividend Changes Inferred from Option and Stock Prices: The Case of Regular Dividend Increases

Sheng-Syan Chen () and Kuei-Chin Fu ()
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Sheng-Syan Chen: Department of Finance, College of Management, National Taiwan University, 85 Roosevelt Road, Section 4, 106 Taipei, Taiwan, ROC
Kuei-Chin Fu: Department of Finance, College of Management, National Taiwan University, 85 Roosevelt Road, Section 4, 106 Taipei, Taiwan, ROC

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2011, vol. 14, issue 03, 563-600

Abstract: This paper measures unexpected dividend changes in testing the free cash flow and information/signaling hypotheses using the Bar–Yosef/Sarig method. The empirical findings reveal the following: (i) The association between announcement period abnormal returns and the cash level is significantly positive for lowqfirms; (ii) The positive association between announcement period, abnormal returns, and the cash level is stronger in lowqthan in highqfirms for most regressions; (iii) Lowqfirms reduce their capital and research and development (R&D) expenditures during the four fiscal years following dividend increase announcements. Our results are consistent with the free cash flow hypothesis.

Keywords: Free cash flow hypothesis; information/signaling hypothesis; regular dividend; unexpected dividend changes (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (5)

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DOI: 10.1142/S0219091511002329

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