Costly Dividend Signaling: The Case of Loss Firms with Negative Cash Flows
28 Pages Posted: 4 Feb 2004
Date Written: January 2004
We examine the dividend-signaling hypothesis in a sample of firms for which dividend increases are particularly costly, namely loss firms with negative cash flows. When compared to loss firms with positive cash flows, we find the predictive power of dividend increases for future return on assets to be greater for loss firms with negative cash flows, consistent with the predictive power of the dividend signal being stronger when its cost is higher. Our results provide support for the dividend-signaling hypothesis and have broader implications since loss firms comprise a large and increasing share of publicly-traded firms.
Keywords: dividends, dividend signalling, losses
JEL Classification: G35, G32, M41
Suggested Citation: Suggested Citation