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The Signaling Power of Specially Designated Dividends

Published online by Cambridge University Press:  06 April 2009

Michael J. Gombola  and
Feng-Ying Liu
Michael J. Gombola
Affiliation:
Department of Finance, Drexel University, Philadelphia, PA 19104
Feng-Ying Liu
Affiliation:
Department of Finance, Rider University, Lawrenceville, NJ 08648
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Abstract

We distinguish among the signaling, free cash flow, and wealth transfer hypotheses in explaining the stock price reaction to specially designated dividend (SDD) announcements. In a direct test of the signaling power of SDDs, we find both a larger stock price reaction and a significant upward revision of earnings forecasts for firms with Tobin's q less than one, but not for other firms. Our results support the conditional signaling hypothesis, which predicts greater effects of favorable information for low q firms. Taken together, our results for stock price effects and earnings forecast revisions do not support either the free cash flow or wealth transfer hypotheses.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 34 , Issue 3 , September 1999 , pp. 409 - 424
Copyright
Copyright © School of Business Administration, University of Washington 1999

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