March 2016
Article
Review of Financial Studies

Dividends as Reference Points: A Behavioral Signaling Approach

By: Malcolm Baker, Brock Mendel and Jeffrey Wurgler

Format:Print

Abstract

We outline a dividend signaling model that features investors who are averse to dividend cuts. Managers with strong unobservable cash earnings separate by paying high dividends but retain enough to be likely not to fall short next period. The model is consistent with a Lintner partial-adjustment model; modal dividend changes of zero; stronger market reactions to dividend cuts than increases; comparatively infrequent and irregular repurchases; and a mechanism that does not depend on public destruction of value, which managers reject in surveys. New tests involve stronger reactions to changes from longer-maintained dividend levels and reference point currencies of ADR dividends.

Keywords

Investment

Citation

Baker, Malcolm, Brock Mendel, and Jeffrey Wurgler. "Dividends as Reference Points: A Behavioral Signaling Approach." Review of Financial Studies 29, no. 3 (March 2016): 697–738.