Why Firms Begin Paying Dividends: Value, Growth and Life Cycle Effects

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Author
Weigand, Robert A.
Fargher, Neil L.
Publisher
Washburn University. School of Business
Sponsor
Kaw Valley Bank
Issue Date
August 2006
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Abstract
We investigate the signaling, agency and risk explanations for dividends within the context of the life cycle hypothesis, which proposes dividend initiation conveys information about firms' transition to a slower growth, "mature" phase. Companies initiating dividends have different characteristics, depending upon their life cycle stage. Low M/B stocks display the most positive price reaction to dividend initiation announcements. High M/B firms have larger profits, cash levels and capital expenditure, but more closely resemble the low M/B firms in terms of these characteristics within three years following dividend initiation. Excess returns earned by low M/B firms are related to decreases in systematic risk, while the returns of high M/B firms are related to their greater profitability.
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