Dividends as Reference Points: A Behavioral Signaling Approach

TitleDividends as Reference Points: A Behavioral Signaling Approach
Publication TypeJournal Article
Year of Publication2016
AuthorsBaker M., Mendel B., Wurgler J.
JournalReview of Financial Studies
Date PublishedMar
ISBN Number0893-9454
Accession NumberWOS:000374225000005

We outline a dividend signaling model that features investors who are averse to dividend cuts. Managers with strong unobservable cash earnings pay high dividends but retain enough to be likely not to fall short next period. The model is consistent with a Lintner partial-adjustment model, modal dividend changes of zero, stronger market reactions to dividend cuts than increases, comparatively infrequent and irregular repurchases, and a mechanism that does not depend on public destruction of value, which managers reject in surveys. New tests involve stronger reactions to changes from longer-maintained dividend levels and reference point currencies of American Depository Receipt dividends.