Dividend Behaviour and DividendSignaling

Abstract

We analyze the dividend behaviour of the aggregatestock market. We propose a model that assumesmanagers minimize the costs of adjustment associatedwith being away from their target dividend payout.The target is expressed as a function of laggedstock prices and permanent earnings, generalizingprevious models of dividend behaviour. We present anew method for measuring unobserved permanentearning based on the Kalman filter. Ourspecification of dividend behaviour is stronglysupported by the data relative to both alternativemodels and over time. We find significant evidenceof dividends conveying information regardingunexpected positive changes in current permanentearnigs. We also find that both the speed ofadjustment of dividends to target dividends andtests of signaling are sensitive to thespecification of the model.