New evidence on the information content of dividend announcements

This study presents new evidence on the relationship between dividend announcements and stock price responses, and provides a more comprehensive empirical analysis than that previously found in the literature. We simultaneously test several competing theories regarding the information content of dividends using two types of announcements: dividend initiations and specially designated dividends. The results of our analyses provide strong support for the single signal, cash-flow signalling hypothesis and only weak support for the John and Lang (1991) and multiple signal, cash-flow signalling model. Supporting evidence is also presented for the predictions of the free-cash flow hypothesis. (Reprinted by permission of the publisher.)