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Market movements and the excess cash theory

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  • Asem, Ebenezer
  • Alam, Shamsul

Abstract

This study examines the effects of changes in the market's outlook for investment on the returns of dividend payers and non-payers to test the excess cash theory for dividends. When the market's outlook declines, the adverse effect is stronger for non-payers than payers and the difference concentrates among firms with high excess cash. When the outlook improves, the positive effect is stronger for non-payers than payers and the difference also concentrates among firms with high excess cash. These results support the theory that a dividend payment is a signal that the firm will not overinvest.

Suggested Citation

  • Asem, Ebenezer & Alam, Shamsul, 2015. "Market movements and the excess cash theory," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 140-149.
    • Handle: RePEc:eee:quaeco:v:55:y:2015:i:c:p:140-149
    DOI: 10.1016/j.qref.2014.07.003
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    1. Esqueda, Omar A., 2016. "Signaling, corporate governance, and the equilibrium dividend policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 186-199.

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