The Information Content of Dividend Changes: Cash Flow Signaling, Overinvestment, and Dividend Clienteles

We examine the cash flow signaling, overinvestment, and dividend clientele explanations for the information content of dividend change announcements. After simultaneously controlling for the standardized dividend change, dividend yield, and Tobin's Q, we find that announcement period excess returns are positively related to the magnitude of the standardized dividend change and to the dividend yield, but unrelated to Tobin's Q. We provide further evidence on the cash flow signaling and overinvestment hypotheses by examining revisions in analysts' earnings forecasts and changes in capital expenditures following dividend change announcements. We find that analysts significantly revise their earnings forecasts following dividend changes and that Q < 1 firms actually increase their capital expenditures following dividend increases and decrease them following dividend decreases. Overall, our findings support the cash flow signaling and dividend clientele hypotheses for stock price reactions to dividend change announcements, but provide little support for the overinvestment hypothesis.