Discussion paper

DP14174 Signaling Safety

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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Citation

Rossi, S, M Weber and R Michaely (2019), ‘DP14174 Signaling Safety‘, CEPR Discussion Paper No. 14174. CEPR Press, Paris & London. https://cepr.org/publications/dp14174

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VoxEU Column

Macroprudential policy and COVID-19: Restrict dividend distributions to significantly improve the effectiveness of the countercyclical capital buffer release

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  • COVID-19
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  • Financial Regulation and Banking
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  • Macroeconomic policy