New Perspectives on the Information Content of Dividend Initiation Announcements: The Special Case of Information Technology Firms

Abstract

This paper examines dividend initiation announcements made by firms in the information technology sector. This sector is the subject of intense investor interest and has long been characterized with hyper growth, high margin, high volatility, and high risk. Also, the corporate life cycle of these firms is different than firms in older, more traditional industries. On the basis of a modern classification of the information technology industry, we examine a wide range of corporate performance and management measures to discriminate between the two theories of the information revealed by the announcement of dividend initiations, the signaling and life cycle theories. Our empirical results are more consistent with the corporate life cycle theory of dividends than with the information signaling hypothesis. This finding helps clarify the nature of the information revealed by the announcement. Moreover, it has clear implications for investors who are interested in the growth prospects of technology firms, or for others interested in their prospective stability and degree of maturity.

Keywords: Dividend Initiation, Dividend Announcements, Dividend Signaling, Corporate Life Cycle

JEL Classification: G14, G18