Information content of dividend changes: cash flow signalling, dividend clientele and free cash flow hypotheses / Norhayati Mohamed ... [et al.]

The study aims to identify the type of information that firms are trying to convey when they change dividend. The first step is to test the relationship between unexpected dividend changes and stock prices by employing the event study methodology. The next step is to evaluate the information content of dividend changes in the context of three hypotheses: the cash flow signalling hypothesis, the dividend clientele hypothesis and the free cash flow hypothesis.
Past explanation to the effect of dividend changes on stock prices is that
firms are signalling their current and/or future cash flow of the firm, or known
as the cash flow signalling hypothesis. Later studies have incorporated other
explanations, which are the dividend clientele hypothesis and the free cash
flow hypothesis. Regression analysis is applied to study the wealth effect of
dividend changes on stock prices and to test for the three hypotheses. The
effect of firm size on the relationship between dividend changes and stock
prices are also analysed by using total assets per share as the proxy variable
for firm size.
The findings show a significant relationship between unexpected dividend
changes and stock prices, which also constitute support for the cash flow
signalling hypothesis. Mixed support is found for the dividend clientele
hypothesis while strong support is found for the free cash flow hypothesis. Next, the finding on the size variable indicates that firm size affect the relationship
between unexpected dividend and stock prices; however, the relationship is not
significant.