The Information Content of Dividends: Safer Profits, Not Higher Profits

Authors: Roni Michaely (Cornell), Stefano Rossi (Bocconi), and Michael Weber (Chicago Booth)

Title: The Information Content of Dividends: Safer Profits, Not Higher Profits

Abstract: Contrary to signaling models' central predictions, changes in profits do not empirically follow changes in dividends, and firms with the least need to signal pay the bulk of dividends. We show both theoretically and empirically that dividends signal safer, rather than higher, future profits.  Using the Campbell (1991) decomposition we find that cash-flow-volatility changes follow dividend and repurchase changes (in opposite direction), and that larger volatility changes come with larger announcement returns consistent with our model's predictions.  The data support the prediction that the signaling cost is foregone investment opportunities.  We conclude payout policy conveys information about future cash-flow volatility.