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Contrary to signaling models’ central predictions, changes in the level of cash flows do not empirically follow changes in dividends.
We use the Campbell (1991) decomposition to construct cash-flow and discount-rate news from returns and find the following: (1) Both dividend changes and repurchase announcements signal changes in cash-flow volatility (in opposite direction); (2) larger cash-flow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-flow news, nor total stock return volatility change following dividend changes. We conclude cash-flow news - and not discount-rate news - drive payout policy, and payout policy conveys information about future cash-flow volatility.
Alibaba, the e-commerce giant that completed a record-setting IPO in the United States in 2014 and was valued at over $700 billion in early 2021, is one of...