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
JEL(s): G35
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.