How do dividends signal when they are highly volatile?

Abstract

This study investigates the signaling role of dividends in China, a market characterized by high dividend volatility. We show that dividend changes, especially increases, primarily signal short-term earnings information. Dividend changes generate only short-term market reactions, with no significant long-term price drift. Notably, the regulation from the China Securities Regulatory Commission diminishes the efficiency of dividend signaling. The information conveyed by dividend changes aligns with that from two other channels: Management Discussion and Analysis (MD&A) tone and investor platform inquiries. Companies strategically adjust the combination of dividends and MD&A tone based on future earnings to convey information. Collectively, these findings suggest that the efficiency of dividend signaling in the Chinese market is limited.