Why Firms Begin Paying Dividends: Value, Growth and Life Cycle Effects
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Authors
Weigand, Robert A.
Fargher, Neil L.
Issue Date
2006-08-1
Type
Working paper
Language
en_US
Keywords
Agency costs , Corporations , Dividends , Life cycle , Risk , Signaling
Alternative Title
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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Citation
Publisher
Washburn University. School of Business