Publications
Publications
  • May 2022
  • Article
  • Accounting Review

Investment as the Opportunity Cost of Dividend Signaling

By: Zach Kaplan and Gerardo Pérez Cavazos
  • Format:Print
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Abstract

We provide evidence that firms with weak investment opportunities (those whose current earnings justify a greater valuation than firms with strong investment opportunities) signal their permanent earnings level through their dividends. In the cross-section, we show that both dividend levels and changes contain more earnings information among firms with weaker investment opportunities. Intertemporally, when aggregate investment opportunities are worse, firms convey more earnings information through their dividend changes. We show that for firms with strong investment opportunities, because funding investment is a higher priority, their dividends reflect changes in investment to a greater extent and they are more likely to cut dividends when increasing investment. Our findings have important implications for several prominent theories of dividend payout.

Keywords

Dividends; Earnings; Investment Opportunities; Payout Policy; Signaling; Capital Structure; Business Earnings; Investment; Opportunities

Citation

Kaplan, Zach, and Gerardo Pérez Cavazos. "Investment as the Opportunity Cost of Dividend Signaling." Accounting Review 97, no. 3 (May 2022): 279–308.

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