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Dividend policy and reputation

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  • Roland Gillet
  • Marc-André Lapointe
  • Philippe Raimbourg

Abstract

We examine the role of reputation when firms use dividends to signal their profitability. We analyze a signaling model in which reputation plays no role in equilibrium. We then show that taking reputation into account as a link between sequential dividend decisions makes it possible to endogenize signaling costs and obtain a separating equilibrium. Lastly, we use the reversibility hypothesis and assume that in each period, managers can reverse their choices in terms of dividend distribution. We find that in most cases, the signaling equilibrium becomes unstable, causing any dividend signaling policy to become difficult to implement.
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Suggested Citation

  • Roland Gillet & Marc-André Lapointe & Philippe Raimbourg, 2008. "Dividend policy and reputation," ULB Institutional Repository 2013/142647, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/142647
    Note: SCOPUS: ar.j
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    1. Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79, March.
    2. Mbodja Mougoué & Ramesh P. Rao, 2003. "The Information Signaling Hypothesis of Dividends: Evidence from Cointegration and Causality Tests," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 441-478, April.
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    8. Rodney D. Boehme & Sorin M. Sorescu, 2002. "The Long‐run Performance Following Dividend Initiations and Resumptions: Underreaction or Product of Chance?," Journal of Finance, American Finance Association, vol. 57(2), pages 871-900, April.
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    10. Brucato, Peter Jr. & Smith, David M., 1997. "An analysis of the role of firm reputation in the market's reaction to corporate dividends," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(3), pages 647-665.
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    Cited by:

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    2. Fayez A. Elayan & Jingyu Li & Maureen E. Donnelly & Allister W. Young, 2009. "Changes to Income Trust Taxation in Canada: Investor Reaction and Dividend Clientele Theory," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5‐6), pages 725-753, June.
    3. Avkiran, Necmi K. & Goto, Mika, 2011. "A tool for scrutinizing bank bailouts based on multi-period peer benchmarking," Pacific-Basin Finance Journal, Elsevier, vol. 19(5), pages 447-469, November.
    4. Jean Canil & Sigitas Karpavičius & Chia‐Feng (Jeffrey) Yu, 2023. "CEO mobility and corporate payouts," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(9-10), pages 1743-1778, October.
    5. Claude Bergeron, 2013. "Dividend growth, stock valuation, and long-run risk," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(4), pages 547-559, October.

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