Dividend Signaling With Excess Cash

Kaplan, Zachary; Cavazos, Gerardo Pérez

doi:10.2139/ssrn.3393065

Cited by 2 publications

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“…In spite of some previous studies that imply a short span timing of information that dividend changes convey about future income, Increasing dividends by mangers are more likely when they predict a persistent increase in prospect earnings (Ham et al 2019). According to this paradoxical results in the literature, a study by Kaplan and Perez(2019) shows changes in dividend payout should not be considered as a signaling tool, rather it's more aligned with the standard capital structure models. For example, Managers decide to pay out excess cash to shareholders when there are no investment opportunities.Considering dividend changes, since dividend increases reduce the amount of budget ready for newer investments, companies may lose potential investment opportunities with a positive net present value (NPV), or they will be forced to finance projects at a higher cost, while in either case, it may lead to a reduction in future profits.…”

Section: Literature Reviewmentioning

confidence: 90%

Untitled

2020

JESI

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The signaling hypothesis has been vastly under investigation for many years. There are two attitudes towards this phenomenon; some believe that firms increase (decrease) their dividend to signal about the future increases in earnings due to asymmetric information that managers have. Adversely, others believe that firms usually increase their dividends when they do not have further lucrative projects with positive net present values. Although there is a lot of empirical testing about this hypothesis that has been placed, there is no investigation about agency costs and cheating potential signaling hypothesis can provide for managers to cheat shareowners and market if it happens in the stock market. Through this article, we will test the signaling hypothesis for the firms listed in Tehran Stock Exchange, a rather volatile emerging market. We concluded that while dividend increases have no significant information content about future earnings, dividend decreases have meaningful information content about decreasing earning in the future. We use different scenarios that managers can react if the signaling hypothesis occurs and analyze the agency cost these scenarios bear on shareowners.

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Section: Literature Reviewmentioning

confidence: 90%

Untitled

2020

JESI

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Does too much liquidity generate instability?

Calcagnini

Gardini

Giombini

et al. 2020

J Econ Interact Coord

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Corporate demand for cash is related to a number of firm-specific characteristics, like the presence of transaction costs, information asymmetry in credit markets, uncertainty and risk aversion. The purpose of this paper is to build a dynamic model that describes the potential chaotic effects of the accumulation of cash by firms over a prolonged period of time. By exploring the theoretical connections between firm financial policies and investment decisions, we show that too much liquidity might generate economic instability. When firm increases the share of cash devoted to risky investment, and reduces the share of cash distributed to shareholders as dividends, the fixed point of the system changes from being stable to being unstable. Moreover, the impact of such a policy on the stability of the system is larger the greater the investment risk. The chaotic behavior is mainly observable in the dynamics of cash, which in turn may affect all investment decisions.

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Dividend Signaling With Excess Cash

Cited by 2 publications

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Does too much liquidity generate instability?

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