THE INFORMATION-CONTENT OF DIVIDEND CHANGES - CASH FLOW SIGNALING, OVERINVESTMENT, AND DIVIDEND CLIENTELES

We examine the cash flow signaling, overinvestment, and dividend clien tele explanations for the information content of dividend change annou ncements. After simultaneously controlling for the standardized divide nd change, dividend yield, and Tobin's Q, we find that announcement pe riod excess returns are positively related to the magnitude of the sta ndardized 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 examing revisions in analysts' earnings f orecasts and changes in capital expenditures following dividend change announcements. We find that analysts significantly revise their earni ngs 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 supp ort the cash flow signaling and dividend clientele hypotheses for stoc k price reactions to dividend change announcements, but provide little support for the overinvestment hypothesis.