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

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Weigand, Robert A.
Fargher, Neil L.
Washburn University. School of Business
Kaw Valley Bank
Issue Date
August 2006
Alternative Title
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.