Why Do Dividends Affect Valuation?

• In Event: Trading, Valuation and Market Efficiency

Abstract

I show that dividends convey positive information about the value of assets-in-place and negative information about the value of growth options. I show this in two ways. First, I hold constant the firms who pay dividends and show that increases in the value of growth options measured at the industry and market level increase the valuation of non-dividend paying firms to dividend paying firms. Second, I show that firms who change the dividend have larger changes in firm value, when more of their valuation relates to assets in place rather than growth options. Finally, I show these differences in valuation are persistent, inconsistent with behavioral explanations. My results contribute to our understanding of why mature firms pay dividends while young firms do not, as the incentives for a higher valuation feedback into payout choice.

Authors

• Zachary R Kaplan, Washington University

• Gerardo Perez Cavazos, Harvard Business School