ACCOUNTING RULES AND THE SIGNALING PROPERTIES OF 20 PERCENT STOCK DIVIDENDS

Stock dividends which increase outstanding shares by less than 25 perc ent require a transfer from retained earnings of the market value of t he new shares, a much larger transfer than that required for stock div idends of 25 percent or more. Choosing a distribution factor near, but below, 25 percent may be an indication of management optimism that fu ture income will replenish retained earnings, avoiding constraints on future cash distributions. In this study, firms declaring 20 percent a nd 25 percent stock dividends are compared. The 20 percent stock divid end firms exhibit significantly greater announcement-period abnormal r eturns and significantly greater post-declaration cash dividend growth . These effects are greatest for firms incorporated in states where th e level of,retained earnings more strictly constrains the payment of c ash dividends.