DP14174 Signaling Safety
|Author(s):||Roni Michaely, Stefano Rossi, Michael Weber|
|Publication Date:||December 2019|
|Keyword(s):||cash-flow volatility, dividends, Payout policy, signaling model|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14174|
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.