Dividend Policy and Corporate Performance

Substantial research has been conducted to determine the signal that results from dividend initiations and omissions. Our study extends from previous research by measuring the long‐term valuation effects following dividend initiations and omissions. We find that firms initiating dividends experience favorable long‐term share price performance. Conversely, firms omitting dividends experience unfavorable long‐term share price performance. The long‐term valuation effects resulting from dividend initiations are more favorable for firms that are smaller, that overinvest, and that had relatively poor performance prior to the initiations. The long‐term effects resulting from dividend omissions are more unfavorable for large firms and for firms experiencing relatively large dividend omissions.