The dividend policies of all-equity firms: A direct test of the free cash flow theory

1994 ◽  
Vol 15 (2) ◽  
pp. 139-148 ◽  
Author(s):  
Anup Agrawal ◽  
Narayanan Jayaraman
Keyword(s):  
Cash Flow ◽  
Flow Theory ◽  
Free Cash Flow ◽  
Direct Test ◽  
Dividend Policies

Signaling Versus Free Cash Flow Theory: What Does Earnings Management Reveal About Dividend Initiation?

2017 ◽  
Vol 34 (2) ◽  
pp. 284-308 ◽  
Author(s):  
Deborah Drummond Smith ◽  
Anita K. Pennathur
Keyword(s):  
Earnings Management ◽  
Cash Flow ◽  
Stock Price ◽  
Flow Theory ◽  
Free Cash Flow ◽  
Real Earnings Management ◽  
Accrual Quality ◽  
Dividend Payout ◽  
Stock Price Reaction ◽  
Prior Literature

We examine earnings manipulation via discretionary accruals and real earnings management prior to the release of cash reserves back to shareholders. Previous research indicates that firms manage earnings upward when they increase dividends, creating a coordinated signal to the market. We study earnings management surrounding dividend initiation to determine whether management is manipulating earnings downward to avoid the discipline imposed by dividends in the years ahead or whether they are signaling to the market. We suggest that the aim of earnings management is not to reduce earnings but that earnings are more likely managed to preserve financial flexibility, create earnings reserves, and postpone shareholders’ expectations for initiating recurring dividends. Rather than signaling with upward earnings management, we find that dividend initiating firms manage earnings downward, consistent with the free cash flow theory. Our results explain findings in prior literature for the surprisingly stable earnings performance and accrual quality in the period just after dividend initiation. Furthermore, the market day stock price reaction is inversely related to earnings management, contradicting the purpose of signaling. We provide evidence that the managerial inertia for initiating dividends represents unique agency concerns compared with an increase in existing dividend payout and to the extent that downward real earnings management does not reverse, we identify a cost to shareholders for the quasi contract of recurring dividend payout.

scholarly journals Kebijakan Dividen dari Perspektive Agency Cost Model (Studi Kasus Perusahaan yang Terdaftar di Bursa Efek Indonesia periode 2011-2013)

2016 ◽  
Vol 5 (1) ◽  
pp. 73
Author(s):  
Akhmad Hitten
Keyword(s):  
Cash Flow ◽  
Ownership Structure ◽  
Cost Model ◽  
Investment Decisions ◽  
Listed Companies ◽  
Agency Cost ◽  
Free Cash Flow ◽  
Dividend Policies ◽  
Main Model ◽  
Observation Period

The paper examines the influence of agency theory on dividend policies with free cash flow,maturity, capital structure, and ownership dividend variables. The sample used in this research isIndonesian listed companies with observation period from 2010 to 2013, and the data collectiontechnique used is data pooling or merging data. The data is analyzed with multiple linearregression analysis in SPSS program. The result of this study indicates that free cash flow,maturity, and ownership structure do not influence devidend policies, however capital structureinfluences dividend policies in Indonesian listed companies. The research also implies thatagency cost theory, as the main model of relevance dividend preposition, cannot explaindividend policies in Indonesian Companies. The investors cannot rely solely on dividend policiesin term of investment decisions in the future. 

scholarly journals THE FREE CASH-FLOW THEORY VERSUS FINANCIAL CONSTRAINTS, INVESTMENTS, CORPORATE GOVERNANCE AND SOFT BUDGETING PROBLEMS

2001 ◽  
Vol 51 (4) ◽  
pp. 489-512
Author(s):  
P. HARBULA
Keyword(s):  
Cash Flow ◽  
Capital Market ◽  
Financial Constraints ◽  
Flow Theory ◽  
Conclusive Evidence ◽  
Free Cash Flow ◽  
Capital Market Imperfections ◽  
Special Cases ◽  
Theory Versus ◽  
Made In

The supposed preference of firms for internal financial sources to fund their investments can be explained by either the free cash-flow or the financial constraints theories, both relying on asymmetric information. Neither theory was found fully valid by recent research. Using a French data panel, conclusive evidence will be made in favour of the free cash-flow theory in special cases. The validity of the free cash-flow theory in special cases will bring new issues to light with the introduction of a new definition: soft budgeting problem of capital. Through this analysis, the possible interaction between capital market imperfections and general equilibrium will also gain new dimension.

scholarly journals Market reaction and fundamental signal in Indonesia

2017 ◽  
Vol 14 (3) ◽  
pp. 210-217
Author(s):  
Winston Pontoh
Keyword(s):  
Life Cycle ◽  
Cash Flow ◽  
Capital Market ◽  
Market Reaction ◽  
Stock Exchange ◽  
Flow Theory ◽  
Free Cash Flow ◽  
Share Prices ◽  
Life Cycle Theory ◽  
Good Signal

The random reaction in capital market by different perceptions and other factors makes it difficult for investors to get their optimum return. The objective of this study is to provide an empirical evidence about how the market will react by fundamental signal from the perspective of life cycle theory, free cash flow theory, and bird in the hand theory. The study presents the analysis of covariate for hypotheses testing with 241 firms as the sample which are listed in Indonesia Stock Exchange for period 2010–2015. This study finds that the life cycle theory and free cash flow theory are not absolute theories to explain the market reaction for any firms, because each firm has its own characteristics. The findings show that share prices shall react differently depending on each characteristics of the firm. The bird in the hand theory seems applicable in any case of firms, since the informational contents by dividend can deliver good signal to investors in capital market. Excluding the smaller and younger firms, this study proves that dividend is still a better way in determining the reaction of share prices, since each type of firms has its own types of dividend payers with different share prices.

scholarly journals Financial Characteristics Of Firms Adopting Poison Pill Plans

2011 ◽  
Vol 4 (2) ◽  
pp. 61
Author(s):  
Nancy K. Mohan ◽  
M. Fall Ainina ◽  
Daniel J. Kaufman, Jr.
Keyword(s):  
Cash Flow ◽  
Flow Theory ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Financial Ratios ◽  
Poison Pill ◽  
Financial Characteristics

This study investigates whether firms adopting poison pill plans possess financial characteristics indicative of their having free cash flow. The analysis uses six financial ratios selected to provide evidence of whether a firm has cash flows in excess of those needed to fund value-enhancing investments. A sample of 184 firms that have adopted poison pill plans were matched with firms from their industries. The results provide little evidence supporting the implications of the free cash flow theory.

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