Corporate growth and strategic payout policy

This study investigates the role of corporate growth in corporate payout policies. We define a good signaling firm as a high-growth firm paying dividends. We find that good signaling firms have better future operating performances, indicating that high-growth firms pay dividends for the purpose of signaling rather than reducing the problem of free cash flow. In addition, the market efficiently gives price appreciation to good signaling firms around the dividend announcement dates. We also report that high-growth firms can utilize dividend payments to reduce information asymmetry between firms and investors and obtain new funds at lower costs. However, if market uncertainty is high, the benefit of good signaling may be offset by the increase in the cost of equity. High-growth firms thus tend to pay lower dividends if they face higher systematic risk or downturn probability.