SIGNALING, INVESTMENT OPPORTUNITIES, AND DIVIDEND ANNOUNCEMENTS

This article examines potential explanations for the wealth effects su rrounding dividend change announcements. We find that new information concerning managers' investment policies is not revealed at the time o f the dividend announcement. We also find that dividend increases (dec reases) are associated with subsequent significant increases (decrease s) in capital expenditures over the three years following the dividend change, and that dividend change announcements are associated with re visions in analysts' forecasts of current earnings. These results are consistent with the cash flow signaling hypothesis rather than the fre e cash flow hypothesis as an explanation for the observed stock price reactions to dividend change announcements.