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The informational content of dividend initiations in asymmetrical information environments
Abstract
The initiation of dividend payments has been shown (Asquith and Mullins (1983)) to convey significant new information regarding management's expectations of future cash flows and the firm's ability to support future dividend payments, and is therefore perceived to be relevant to firm-valuation. This study seeks to extend earlier work on the "information content of dividend initiations" by empirically examining whether dividend initiations of similar magnitude have differing implications for firm-valuation depending on the firm's information environment. Specifically, the objective of this dissertation is to empirically test whether the magnitude and volatility of security price reaction to a dividend initiation announcement is associated with the firm's information environment. Since, the firm's information environment is not directly observable, six firm-specific characteristics are used as proxy measures. The six proxies are firm size, percentage of institutional holding in the firm's equity, the number of institutions holding the firm's equity, the number of analysts following, the dispersion of analysts' earnings forecasts and the correlation between firm-earnings and macro-economy wide earnings. The study also attempts to statistically identify the firm-specific characteristic(s) which best explain(s) the magnitude of security price reaction at the time of dividend initiation. In general, the results indicate substantially higher price reaction to dividend initiation announcements for "low" information environment firms relative to "medium/high" information firms with respect to the market capitalization, percentage of institutional equity holding, number of institutions holding firm-equity, and number of analysts following proxies. For these proxies, the "event period" volatility of security returns also increases sizeably relative to the estimation period for "low" information environment firms. Similar increases in "event period" volatility are not found for the "medium/high" information environment firms with respect to the market capitalization, percentage of institutional equity holding and number of institutions holding firm-equity proxies. The results also indicate that firm size and the percentage of institutional equity holding are perhaps the most powerful explanatory information environment proxy variables amongst the ones examined in the study.
Subject Area
Finance
Recommended Citation
Mitra, Devashis, "The informational content of dividend initiations in asymmetrical information environments" (1991). Doctoral Dissertations Available from Proquest. AAI9207440.
https://scholarworks.umass.edu/dissertations/AAI9207440