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Payout Policy

Paper Session

Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Commonwealth Hall A2
Hosted By: American Finance Association
  • Chair: Joan Farre-Mensa, Cornerstone Research

Do Dividends Convey Information About Future Earnings?

Charles Ham
,
Washington University-St. Louis
Zachary Kaplan
,
Washington University-St. Louis
Mark Leary
,
Washington University-St. Louis

Abstract

Yes. Using an “event window approach” which compares earnings after dividend changes to those before we show dividend changes predict unexpected future earnings for horizons up to three years after the dividend change. We also show that there is heterogeneity in the firms’ commitment to maintain the dividend and this affects the persistence of the earnings change forecasted by the dividend. Large dividend increases and decreases are maintained less frequently, discounted by the market, and associated with more transitory earnings changes. Smaller dividend increases constitute a firmer commitment to future payout and forecast highly persistent earnings changes. Our results suggest the market reaction to dividend changes reflects, at least in part, new information about future earnings conveyed by the announcement.

What is Revealed When Firms Repurchase Against Short Selling?

Leonce Bargeron
,
University of Kentucky
Alice Bonaime
,
University of Arizona

Abstract

We investigate the causes and consequences of firms disagreeing with short sellers by repurchasing company stock. Though short sellers are generally adept at identifying overvalued equity and agency problems can bias managerial decisions, these repurchases contain positive, private information that dominates short sellers' information on average. Information channels include future earnings, changes in risk, and acquisition activity. Repurchases are not informative if an activist investor recently identified the management team as inefficient or if repurchases are dilution-motivated or conducted under a preset plan. Our results suggest that short sellers and other investors can glean information from publicly available repurchase disclosures: An implementable trading strategy based on our findings yields annual abnormal returns of approximately 7.5%.

The Dark-Side of Banks' Nonbank Business: Internal Dividends in Bank Holding Companies

Jonathan Pogach
,
Federal Deposit Insurance Corporation
Haluk Unal
,
University of Maryland

Abstract

Our study highlights the liquidity and capital pressures created by non-banking activities on banks residing within the same bank holding company (BHC). We use a sample of BHCs with large non-bank subsidiaries between 2002 and 2007 to show that banks bear the pressures of dividend smoothing. Banks in BHCs increase internal dividends to parents regardless of their own income. In contrast, non-banks in BHCs appear to be shielded from the pressures of inflexible external dividend policies. We also show that when faced with declining incomes, the banks fund their internal dividends through increased borrowing. Using a difference-in-differences, we show that banks in BHCs increase their payout ratios by 7 percentage points in response to major non-bank acquisitions during an expanded sample period of 1993-2007. Our evidence on the extraction of cash from banks to fund non-bank activities and capital market pressures to smooth dividends sheds new light on the debate on the optimal scope of BHCs. These observations support the arguments of a dark-side to internal capital markets in which the federally insured banks become a source of strength to the BHC and its non-bank segment.
Discussant(s)
Gustavo Grullon
,
Rice University
Ekkehart Boehmer
,
Singapore Management University
Gustavo Suarez
,
Federal Reserve Board
JEL Classifications
  • G3 - Corporate Finance and Governance