The dividend signaling hypothesis and the corporate life cycle

Abstract

Purpose

This paper aims to examine the relationship between the dividend signaling hypothesis and a firm's life cycle.

Design/methodology/approach

The authors use Dickinson's (2011) methodology to develop a proxy for the firm's stages in its life cycle and to examine the relationship between dividends and future earnings following a nonlinear setting.

Findings

Using a sample of US firms during the 2000–2014 period, the authors find that the signaling hypothesis can be dependent on firm-specific characteristics, such as life cycle stages. The authors report that the relationship between dividend changes and subsequent earnings changes is different for different life stages. They also find that changes in the amount of the dividend provide some information about future earnings, especially during the early (introductory and growth) stages. These results are consistent with the use of earnings or return on assets as the dependent variables in models of earnings expectations.

Originality/value

The authors believe that this is the first time that the dividend signaling hypothesis has been linked to the life cycle of the firm.

Citation

Meza, N., Báez, A., Rodriguez, J. and Toledo, W. (2020), "The dividend signaling hypothesis and the corporate life cycle", Managerial Finance, Vol. 46 No. 12, pp. 1569-1587. https://doi.org/10.1108/MF-10-2019-0512