Signaling Managerial Optimism through Stock Dividends and Stock Splits:  A Reexamination of the Retained Earnings Hypothesis

Crawford, Dean; Franz, Diana R.; Lobo, Gerald J.

doi:10.2139/ssrn.264179

Cited by 13 publications

(17 citation statements)

References 15 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…This study though questioned the underlying assumption of the retained earnings hypothesis that the reduction in retained earnings resulting from the accounting method chosen for the stock distribution imposes costs on the distribution firm from debt covenants and / or state incorporation laws. Crawford et al (2005) show that the previous findings in support of the signalling or retained earnings hypothesis can be attributed to specification and measurement choices that bias the results in favour of the retained earnings hypothesis. According to the authors, the support for the retained earnings hypothesis is weaker when the sources of the bias are removed.…”

Section: Economic Intuition and Theoretical Frameworkmentioning

confidence: 68%

“…A more recent study by Crawford et al (2005) replicates and extends the Grinblatt et al (1984) and Rankine and Stice (1997a and 1997b). This study though questioned the underlying assumption of the retained earnings hypothesis that the reduction in retained earnings resulting from the accounting method chosen for the stock distribution imposes costs on the distribution firm from debt covenants and / or state incorporation laws.…”

Section: Economic Intuition and Theoretical Frameworkmentioning

confidence: 86%

“…The signalling hypothesis, which is tested by Bechmann and Raaballe (2007) has also been examined in prior studies, among those, Crawford et al (2005), Grinblatt, Masulis and Titman (1984) and Rankine and Stice (1997a and 1997b). The retained earnings hypothesis predicts that stock distributions accounted for by reducing retained earnings are more credible signals of managerial optimism than stock distributions that do not reduce retained earnings.…”

Section: Economic Intuition and Theoretical Frameworkmentioning

confidence: 99%

“…In the case of stock distributions, the penalty for a false signal occurs if the firm is restricted in its payment of cash dividends by debt covenants or state incorporation laws, and the restrictions are based on the firm's balance in retained earnings. If subsequent earnings are not sufficient to offset the reduction in retained earnings resulting from the stock distribution, then the cash dividend restrictions are more likely to become binding and force the firm to adopt a suboptimal dividend payout policy (Crawford et al, 2005).…”

Section: Economic Intuition and Theoretical Frameworkmentioning

confidence: 99%

See 3 more Smart Citations

Discussion of The Differences Between Stock Splits and Stock Dividends: Evidence on the Retained Earnings Hypothesis

Charitou

2007

Business Fin & Account

View full text Add to dashboard Cite

Several studies in the past few decades examined empirically why firms choose to split their stock or distribute stock dividends and why the market reacts favourably to these distributions. Both events date back several decades. Stock dividends date back to the Elizabethan Age whereas stock splits became common as early as the beginning of the twentieth century (Lakonishok and Lev, 1987). Even though both stock dividends and stock splits have been in existence for several decades, two major questions are raised in the literature. First, if stock splits and stock dividends are just cosmetic in nature and thus they should not have any effect on the total market value of the firm, why do firms continue to engage in such financial distributions? Secondly, why is there a positive stock market reaction to stock split and stock dividend distributions?Various hypotheses were advanced in the existing literature to explain the persistence of stock splits and stock dividends and the related stock price reactions to these announcements, yet none of these hypotheses appear to be strongly supported by the empirical evidence provided thus far. These hypotheses can be broadly classified into two groups: signalling and optimal price hypotheses. 1 As far as the signalling hypothesis is concerned, it has been suggested that, given asymmetric information between managers and shareholders, managers use financial decisions such as stock dividend distributions and stock splits to convey favourable information to shareholders. However, for a signalling device to be valid, there should be a cost associated with sending false 1 Additional hypotheses are discussed in the literature, among those are (a) the market maker hypothesis which argues that the size of the relative bid-ask spread is important for the incentives of the market maker to promote the stock, (b) the neglected firm hypothesis which suggests that stock distributions are made mainly by undervalued firms, and (c) the cosmetic hypothesis which supports that stock distributions are mainly cosmetic in nature (Bechmann and Raaballe, 2007).

show abstract

Section: Economic Intuition and Theoretical Frameworkmentioning

confidence: 68%

Section: Economic Intuition and Theoretical Frameworkmentioning

confidence: 86%

Section: Economic Intuition and Theoretical Frameworkmentioning

confidence: 99%

Section: Economic Intuition and Theoretical Frameworkmentioning

confidence: 99%

See 2 more Smart Citations

Discussion of The Differences Between Stock Splits and Stock Dividends: Evidence on the Retained Earnings Hypothesis

Charitou

2007

Business Fin & Account

View full text Add to dashboard Cite

show abstract

“…A diferença de reação entre os dois eventos pode ser explicada pelos ganhos retidos, uma vez que o método contábil usado para a distribuição das novas ações pode afetar a resposta ao anúncio da distribuição (Crawford et al, 2004). Como na bonificação há uma transferência de recursos da conta de lucros ou reservas para a conta capital social, enquanto que no desdobramento há apenas uma alteração na conta capital social, espera-se que a reaçãoàs bonificações seja superiorà reação aos desdobramentos.…”

Section: Variável Dummyunclassified

Modelagem de Equações Estruturais Aplicada à Reação a Bonificações e Desdobramentos: integrando as hipóteses de sinalização, liquidez e nível ótimo de preços.

Vieira

Becker

2011

Braz. Rev. Fin.

View full text Add to dashboard Cite

This work develops a hybrid model of structural equations able to take simultaneously the hypotheses of signaling, liquidity, and optimal price level to explain the reaction to the stock dividends and stock splits. In the measurement model four constructs were defined: trading activity, spread, size, and price. The structural model defines extant relations from the proposition of 22 sub-hypotheses. A sample of 321 splits performed in the Brazilian market between 1990 and 2004 was used for assessing the model. Confirmatory factor analysis revealed the validity and coherence of the four constructs. The structural model confirmed 9 original sub-hypotheses.

show abstract

Stock distributions and the Retained Earnings Hypothesis revisited

Heavilin

Songur

2019

Finance Research Letters

View full text Add to dashboard Cite

Large stock distributions may be accounted for as stock splits or stock dividends. The Retained Earnings Hypothesis (REH) suggests that the latter method of accounting signals improving future cash flows, but prior evidence is mixed and the debate is still open. We use a large sample of stock distribution and document economically significant evidence consistent with the REH which helps resolve the open debate.

show abstract

Signaling Managerial Optimism through Stock Dividends and Stock Splits: A Reexamination of the Retained Earnings Hypothesis

Cited by 13 publications

References 15 publications

Discussion of The Differences Between Stock Splits and Stock Dividends: Evidence on the Retained Earnings Hypothesis

Discussion of The Differences Between Stock Splits and Stock Dividends: Evidence on the Retained Earnings Hypothesis

Modelagem de Equações Estruturais Aplicada à Reação a Bonificações e Desdobramentos: integrando as hipóteses de sinalização, liquidez e nível ótimo de preços.

Stock distributions and the Retained Earnings Hypothesis revisited

Contact Info

Product

Resources

About