Dividend Initiations and Long Run IPO Performance
32 Pages Posted: 6 Dec 2010 Last revised: 2 Feb 2011
Date Written: November 29, 2010
Dividend initiations are an economically significant event that has important implications for a firm’s future financial capacity. Given the market’s expectation of a consistent payout, managers of IPO firms must approach the initial dividend decision cautiously. We compare the long run performance of IPO firms that initiated a dividend with that of similarly-matched non-payers, and find robust results that firms which initiated a dividend perform significantly better up to five years after the initiation date. Further tests show that the post-initiation firm performance is explained mostly by dividend theory of signalling rather than free cash flow.
Keywords: Dividend initiation, IPOs, signalling, free cash flows, long run performance
JEL Classification: G35
Suggested Citation: Suggested Citation