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Title: Signaling Safety

Author(s): Roni Michaely, Stefano Rossi and Michael Weber

Publication Date: December 2019

Keyword(s): cash-flow volatility, dividends, Payout policy and signaling model

Programme Area(s): Financial Economics

Abstract: Contrary to signaling models' central predictions, changes in the level of cash flows do not empirically follow changes in dividends. We use the Campbell (1991) decomposition to construct cash-flow and discount-rate news from returns and find the following: (1) Both dividend changes and repurchase announcements signal changes in cash-flow volatility (in opposite direction); (2) larger cash-flow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-flow news, nor total stock return volatility change following dividend changes. We conclude cash-flow news--and not discount-rate news--drive payout policy, and payout policy conveys information about future cash-flow volatility.

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Bibliographic Reference

Michaely, R, Rossi, S and Weber, M. 2019. 'Signaling Safety'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14174