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Signaling safety

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  • Michaely, Roni
  • Rossi, Stefano
  • Weber, Michael

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 directions); (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.

Suggested Citation

  • Michaely, Roni & Rossi, Stefano & Weber, Michael, 2021. "Signaling safety," Journal of Financial Economics, Elsevier, vol. 139(2), pages 405-427.
    • Handle: RePEc:eee:jfinec:v:139:y:2021:i:2:p:405-427
    DOI: 10.1016/j.jfineco.2020.08.013
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    More about this item

    Keywords

    Dividends; Payout policy; Cash-flow volatility; Signaling model;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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