Turki 2018 Dividend Policy and Stock Acquisition Announcement Returns A Test of Asymmetric Information Theory

Original Article
DIVIDEND POLICY AND STOCK ACQUISITION ANNOUNCEMENT RETURNS:
A TEST OF ASYMMETRIC INFORMATION THEORY
Aymen TURKI1
European Business School of Paris, INSEEC U.

1
Corresponding author: aymen.turki@ebs-paris.com
The author acknowledges the support of the ECCCS Research Center and the IREBS
Research Center. He thanks Sebastien Dereeper, Khamis Al-Yahyai (25th Australasian
Finance and Banking Conference, 2012), Uri Benzion and Viktoria Dalko (39th Eastern
Economic Association Conference, 2013), and Hubert De-La-Bruslerie (30th French Finance
Association Conference, 2013) for their helpful comments and suggestions.
This article has been accepted for publication and undergone full scientific peer review but
has not been through the copyediting, typesetting, pagination and proofreading process which
may lead to differences between this version and the Version of Record. Please cite this
article as an “Accepted Article”, doi: 10.1111/jfir.12164.
This article is protected by copyright. All rights reserved.

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Abstract
This study examines 711 U.S. stock-based acquisitions announced between 1985 and 2013 to
analyze the relationship between the acquirer’s dividend policy and its stock returns when the
acquisition is announced. Asymmetric information theory suggests that the lower the level of
uncertainty about the acquirer’s value, the smaller the acquirer’s price drop when a stock-
based acquisition is announced. In support of this theoretical prediction, the current study
identifies less negative acquirer stock returns around the announcement of stock acquisitions
initiated by dividend-paying firms compared with those initiated by non–dividend-paying
firms.

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JEL classification: G34, G35
I. Introduction
Even as studies of mergers and acquisitions have proliferated, following the development of
corporate control activity, their returns remain poorly understood, including the potential for
negative market reactions to stock-based deals. In Myers and Majluf’s (1984) early models of
asymmetric information to explain negative returns to stock-based mergers and acquisitions,
they assume information asymmetry on both sides, such that each merging firm retains private
information about its own value. This result, as further developed by Hansen (1987) and
Fishman (1989), is common when predicting the same negative stock price impact of stock
payments regardless of the characteristics of the stock issued. Testing hypotheses pertaining
to the specific features of the stock that firms choose to issue to pay for the transaction thus
might be additionally insightful. Dividend-paying firms create less information asymmetry
(Lang and Litzenberger, 1989; Howe and Lin, 1992; Khang and King, 2006; Li and Zhao,
2008), such that the acquirer’s dividend policy might help reduce negative market reactions to
stock-based mergers and acquisitions.
No extant research addresses this issue directly, though recent studies consider it empirically
in seasoned equity offering (SEO) and initial public offering (IPO) settings. Booth and Chang
(2011) analyze the relationship between dividend payment status and SEO announcement
returns and find that since the mid-1980s, the market has reacted less negatively to dividend-
payer SEO announcements than to non–dividend-payer SEO announcements. By examining
whether the dividend status of newly listed firms can explain IPO performance, How et al.
(2011) offer support for asymmetric information theory, indicating that dividend payers are
more profitable after an IPO. This effect should be apparent in stock-based acquisitions too:

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Dividend-paying acquirers should have less negative announcement-induced returns than
non–dividend-paying acquirers, because dividend payers create less information asymmetry
about the real value of their traded shares. The argument underlying this central hypothesis is
that dividends resolve information asymmetry about stock valuation, such that investors who
are uncertain about the true value of the stock being used to pay for the transaction react less
negatively to the announcement of a stock offer.
To test this hypothesis, the current study relies on a sample of 711 U.S. mergers and
acquisitions announced between 1985 and 2013 that features only listed acquirers, to ensure
the availability of dividend data, and it applies standard data screens to identify significant
deals (Masulis, Wang and Xie, 2007). Dividend status (i.e., whether the acquirer pays
dividends) before an acquisition is the focal variable. The number of analysts following the
acquirer’s stock in the month before the deal announcement, forecast error, and forecast
dispersion represent acquirer-side information asymmetry. The computation of the acquirer’s
cumulative abnormal returns (CAR) around the announcement date relies on Brown and
Warner’s (1985) standard event study methodology, with several empirical tests. First,
univariate tests determine whether the acquirer announcement return is, on average, less
negative for stock-based deals initiated by dividend-paying acquirers than for those initiated
by non–dividend-paying acquirers. Second, a cross-sectional analysis of acquirer abnormal
return reveals whether the dividend status of the acquirer reduces negative market reactions to
the deal announcement. These tests account for target status (i.e., whether the target is
privately held or publicly traded), given the effect of this target-specific information on the
amount of abnormal returns around the announcement. The data indicate that dividend-paying
stock acquirers exhibit less negative stock returns around the time of the announcement than

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non–dividend-paying stock acquirers, consistent with the idea that the former establish less
uncertainty about the value of the stock they have used to finance the deal.
This result holds after robustness checks too. First, the check for the effect of dividend
payment activity over the sample period involves a cross-sectional analysis of announcement
returns for two subperiods: 1985–2002 and 2003–2013. Second, alternative measures of
dividends include whether investors consider changes in and the amount of the dividend
before reacting on the stock acquisition announcement day. Third, Heckman’s sample
selection model addresses concerns about endogeneity, such that certain types of firms might
choose to pay dividends, and the sample of dividend-paying acquirers might not be random.
Fourth, an assessment of whether dividends solve information asymmetry for cash
acquisitions, by comparing the effect of dividends on announcement returns for stock versus
cash acquisitions, shows that dividends do not solve stock valuation uncertainty for cash
payments. This finding is unsurprising; dividends solve the information asymmetry that
emerges from the inaccurate valuation of the acquirer’s stock used to pay for the acquisition
(Shleifer and Vishny, 2003), which induces negative announcement returns for the acquirer
(Chemmanur, Paeglis and Simonyan, 2009). In cash acquisitions, misvalued stock is not at
stake, because the payment is solely in cash.
II. Theoretical background
This section reviews relevant contributions from merger-and-acquisition literature, as well as
insights from literature pertaining to the implications of dividend policy on asymmetric
information.
Stock payment, asymmetric information, and negative announcement returns

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Theoretical evidence indicates that issuing equity tends to cause the acquirer’s price to drop.
With an adverse selection argument, Myers and Majluf (1984) argue that issuing stock to
relatively uninformed target shareholders causes a negative market reaction, because investors
hedge against adverse selection concerns. Hansen (1987) considers a two-sided asymmetric
information equilibrium, in which the acquirer offers stock when it is overvalued and cash
when it is undervalued. The target uses both the method of payment and the size of the stock
offered as signals of the acquirer’s value. Noting the target’s strategy, the acquirer optimally
chooses the method of payment and the stock size in a way that sustains the target’s beliefs.
Empirical studies support this theoretical asymmetric information argument. Travlos (1987),
Servaes (1991), and Schlingemann (2004) show that abnormal returns to acquirer
announcements are more negative on average for stock acquisitions than for cash acquisitions.
Eckbo, Giammarino and Heinkel (1990) and Eckbo and Thorburn (2000) find that average
announcement returns to acquirers are highest for all-cash deals and lowest for all-stock deals.
Using acquisitions of U.S. targets from 1980 to 2005, Betton, Eckbo and Thorburn (2008a)
find that all-stock deals cause a negative market reaction, because the choice of a stock
payment is motivated by asymmetric information. Therefore, the investor requires other
means to interpret the real value of the acquirer. The acquirer’s dividend payment in stock-
based acquisitions could serve this purpose, thereby reducing investor concerns about adverse
selection.
Information content of acquirer announcement return
Using acquirer announcement returns as an indicator of the acquirer’s asymmetric
information may seem puzzling; the announcement return reveals information about various
things. As Grinblatt and Titman (2002) note, an announcement return cannot be attributed

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completely to the expected profitability of the acquisition but rather may reveal more about
how the market evaluates the acquirer’s value instead of the acquisition’s value. Hietala et al.
(2003) analyze the amount of information that can be extracted from acquirer announcement
returns and assert that the announcement indicates potential synergy and the stand-alone value
of the firms involved, such that it is not possible to dissociate these informational effects.
Grinblatt and Titman (2002) also state that the market may react positively to announcements
of a cash-financed acquisition, which inform investors about the firm’s ability to raise cash
for the acquisition—even if the acquisition is paid for with stock by a dividend-paying
acquirer, because the dividend payment also indicates the acquirer’s ability to raise cash. In
Shleifer and Vishny’s (2003) model of stock market–driven acquisition, acquirers have a
powerful incentive to have their equity overvalued, so they can make their acquisitions with
stock. This model also yields new predictions about acquirer announcement returns. Hietala et
al. (2003) propose a model for precisely interpreting short-run acquirer returns and identify
two situations in which it is possible to disentangle the informational effects of announcement
returns: when the acquisition is not consummated, and when the acquisition is a takeover
contest between two bidders. Fuller et al.’s (2002) research design also can control for
information contained in acquirer announcement returns. They examine returns to acquirers
that make multiple acquisitions to neutralize the informational effect of the acquirers’
characteristics and thus can test how the acquirer’s returns vary with the target status (public
or private) and the method of payment (cash, stock, combination). For Moeller,
Schlingemann, and Stulz (2007), announcement returns for stock acquisitions of publicly
traded firms decrease with diverse opinions among investors and information asymmetry.
Leveraging these insights, the current study investigates acquirer announcement returns by

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accounting for target status and controlling for the acquirer’s valuation uncertainty, contained
in the announcement returns.1
Dividend policy and asymmetric information
Both theoretical and empirical research extensively addresses the association between
dividend policy and information asymmetry. In pioneering theoretical work, Pettit (1972),
Charest (1978), and John and Williams (1985) identify the information content of dividends.
Miller and Rock (1985) also show that an information signaling equilibrium exists under
asymmetric information, and trading shares with higher dividends leads to less uncertainty
about the firm’s true value. In Bhattacharya’s (1979) model, dividends provide a costly way
to reduce information asymmetry about the firm’s value. He notes that dividends are
informative because they are taxed at higher rates than are capital gains. Myers and Majluf
(1984) also analyze the joint effect of information asymmetry and dividend policy and
propose that to avoid price drops in response to stock issue announcements, firms should
issue equity only if no information asymmetry exists, as well as establish a dividend policy
that ensures changes in dividends correlate closely with changes in value.
Empirical literature also confirms that dividend payers create less information asymmetry
than non-dividend payers. Howe and Lin (1992) find a positive association between the
dividend yield and bid-ask spread, so they infer that a dividend payment conveys information
to the market and reduces information asymmetry. Khang and King (2006) examine the
relationship between dividends and information asymmetry using insider returns as a proxy
for information asymmetry. The negative association they uncover is consistent with the
1
Hansen and Lott (1996) first noted the impact of target status (publicly traded or privately
held) on announcement returns; subsequently, Chang (1998), Fuller, Netter and Stegemoller
(2002), Moeller, Schlingemann, and Stulz (2004), and Bradley and Sundaram (2006) have
examined the effects of target status on market reactions to the deal’s announcement.
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proposition that firms with higher dividends have less information asymmetry. Finally, Li and
Zhao (2008) find that firms with lower earnings forecast error are more likely to be dividend
payers. The current study revisits these joint effects of a dividend policy and information
asymmetry in the merger-and-acquisition setting, by exploring whether the acquirer’s
dividend payment reduces negative market reactions to announcements of stock-based
acquisitions.
What uncertainty gets reduced through dividend payments in acquisitions?
According to Grinblatt and Titman (2002), announcement returns are more informative about
how the market evaluates the acquirer’s value than about the acquisition’s value. Hietala et al.
(2003) specify that an announcement return reveals information about the stand-alone value
of the acquirer and of the target. The informational content available from dividends then
could be valuable, if the dividends provide investors with information about the acquirer’s
valuation and allow them to react more accurately to the announcement of an acquisition.
Dividends solve various information gaps: future earnings, free cash flow, maturity, access to
additional funds, and valuation, among others. The idea that they could convey information
about future earnings also appears in various signaling models (Lintner, 1956; Bhattacharya,
1979; Miller and Rock, 1985; John and Williams, 1985), and it may be relevant for mergers
and acquisitions, because the acquirer’s dividends could convey information about post-
acquisition cash flow. Target shareholders, which exchange their stock with that of the
acquirer in the case of stock-based acquisitions, benefit, as do acquirer shareholders if the
post-acquisition cash flow is positive, as signaled ex ante by dividends. Alternative
hypotheses also predict dividends might be related to firm value, such as various agency cost–

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based explanations: Dividends reduce free cash flow (Easterbrook, 1984) and may reduce
agency problems between inside and outside shareholders (La Porta et al., 2000).
Empirical event studies also confirm that the price reactions to dividend payments tend to be
significant and that dividends have some information content, because stock prices react to
dividend changes (Aharony and Swary 1980; Dielman and Oppenheimer 1984; Healy and
Palepu 1988). Michaely, Thaler and Womack (1995) show that dividend initiations increase
the stock price; omissions are followed by stock price declines. In turn, Travlos (1987, p. 944)
argues that “bidding firms suffer significant losses in pure stock exchange acquisitions, but
they experience normal returns in cash offers.” In this sense, dividends may reduce
uncertainty about the acquirer’s valuation and the valuation of its stock, so investors may
react less negatively to announcements, especially of stock-based acquisitions; concerns about
of misvalued stock as a method of payment (Shleifer and Vishny, 2003; Dong et al., 2006)
and its negative impact on announcement returns is limited mainly to acquisitions paid for in
stock (Travlos, 1987; Chemmanur, Paeglis and Simonyan, 2009).
In IPO studies, stock price returns appear higher for the dividend group of IPO-issuing firms
than for the non-dividend group. According to Jain, Shekhar and Torbey (2003), dividend IPO
firms maintain these higher returns across different time windows, consistent with the notion
that a dividend policy can signal better firm value in an IPO setting. How et al. (2011) also
compare the returns of IPO firms that initiate a dividend against those of matched non-payers
and find higher returns for dividend-initiating IPO firms. These findings support a dividend
signaling argument, rather than free cash flow theory, in that dividend-paying IPO firms
appear more likely to report increases in valuation in periods following their dividend
initiation.

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Among SEO studies, previous authors reconcile the gap between theory and empirical results
by identifying a structural change in the way that the stock market treats dividend-paying and
non–dividend-paying SEO firms. Despite the inconsistent results of Loderer and Mauer
(1992), who use U.S. data from a period (1973–1974) when dividend payments were frozen
by law, Booth and Chang (2011) identify less negative SEO announcement returns for
dividend payers than non-payers. They show that dividends solve the valuation uncertainty of
SEO firms, so the market typically differentiates dividend and non-dividend payer SEOs,
particularly after the mid-1980s.
Despite this extensive literature on the effect of dividends on valuation uncertainty, no
empirical study investigates the effect of dividend policy on firms’ valuation uncertainty in
mergers and acquisitions. This study, noting the evidence that dividends affect SEO and IPO
returns, predicts that dividend policy also reduces the negative returns to acquisitions.
III. Data and methods
Data
The sample includes deals announced between January 1985 and December 2013. The data
come from the Securities Data Corporation (SDC) U.S. Platinum Mergers and Acquisitions
Database. Deals announced before 1985 do not contain the data required to study the
acquirer’s dividend policy. Moreover, the disappearing dividend puzzle documented by Fama
and French (2001) suggests that a firm’s dividend payment was not an important signal prior
to the mid-1980s.

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The sample was limited to transactions with a deal value (i.e., total consideration paid by the
acquirer) of $1 million or more, to ensure a focus on significant deals. 2 This sampling
criterion results in a sample of 112,137 deals. Next, only listed acquirers were retained, to
ensure the availability of dividend data. To check the role of dividend policy on stock
acquisition returns, compared with cash acquisition returns, the sample was further limited to
transactions paid for solely in common stock. 3 Consistent with prior literature (Officer,
Poulsen, and Stegemoller, 2009), the acquirer must have purchased 50% or more of the target
shares in the acquisition. The SDC acquisition announcements also must identify the terms of
the proposal with sufficient clarity. These standard data screens reduce the sample to 6,250
deals.
Several other reductions reflect the specific requirements for this study. First, following
Chemmanur, Paeglis and Simonyan (2009) and Booth and Chang (2011), all financial firms
(i.e., SIC codes between 6000 and 6999) and utilities (SIC codes 4900-4999) are excluded.
Second, sufficient acquirer and market daily stock prices from the Center for Research in
Security Prices (CRSP) must be available to calculate acquirer abnormal returns around the
deal announcement. Third, the annual dividends per share and earnings per share of the
acquirer must be available in the CRSP–Compustat Merged database, to define the acquirer’s
dividend policy. These criteria reduce the sample to 1,131 deals. Fourth, the number of
analysts covering the acquirer in the month before the acquisition announcement and the
standard deviation of the acquirer's analyst earnings forecasts must be available in the
Institutional Brokers’ Estimate System (IBES), which is true of 755 deals. Fifth, following
2
In line with Fuller, Netter and Stegemoller (2002), the dollar value includes the amount paid
for all common stock, common stock equivalents, preferred stock, debt, options, assets,
warrants, and stake purchases made within six months of the deal announcement date.
3
An additional data extraction gathers information about transactions paid for in cash. This
extraction is necessary to compare the effects of dividend payments on announcement returns
between stock-based and cash-based acquisitions for a subsequent robustness check (Section
V).
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Fuller et al. (2002), acquirers that appear multiple times in the sample (i.e., clustered
acquisitions, such that the acquirer absorbs two or more firms within a short period) are
excluded, because the acquirer’s abnormal return for a particular target cannot be isolated.
The final sample thus includes firms with the necessary accounting items for the prior fiscal
year-end, resulting in 711 deal observations.
Figure I summarizes the time series of stock acquisition activity in the sample and plots the
fraction of stock acquirers that pay dividends. It indicates distinct cyclicality in the number of
stock acquisitions. That is, in the 1980s, stock acquisition activity is minimal compared with
the mid- to late 1990s. The clustering of stock deals between 1994 and 2000 aligns with the
fifth acquisition wave and confirms a behavioral explanation that proposes that rational
managers take advantage of consistent pricing errors in the market to buy real assets with
overvalued stock (Shleifer and Vishny 2003). Therefore, the sample exhibits the anticipated
dominance of stock acquisitions during periods of high misevaluation. 4 Harford (2005)
indicates that most activity in aggregate merger waves is driven by clustered industry shocks
(neoclassical explanation) and overall capital misvaluation. Thus, time effects and merger-
and-acquisition activity (i.e., number of stock acquisitions) should be controlled for in
empirical analyses. Andrade, Mitchell and Stafford (2001) also provide evidence that merger-
and-acquisition activity in the 1990s strongly clusters by industry, so it also is necessary to
control for industry effects in multivariate tests.
[INSERT FIGURE I HERE]
With regard to dividend distribution activity, the percentage of acquirers that pay dividends
declines from 1985 to 2002, consistent with Fama and French (2001). After 2002, the trend
4Jensen (2004), Shleifer and Vishny (2003), Ang and Chen (2002), Malmendier and Tate
(2005), Dong et al. (2006), and Rhodes-Kropf and Viswanathan (2003) examine the
association between high valuations and the propensity of firms to make stock acquisitions.
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reverses. The percentage of acquirers paying dividends increases, from 22% in 2002 to 36%
in 2011, with a slight dip in 2010 (Floyd et al., 2015). This study therefore controls for the
effect of dividend payment activity over the sample period. As Booth and Chang (2011)
propose, multivariate analyses of announcement returns can be performed for two subperiods:
1985–2002 and 2003–2013 (see Section V).
Methodology
The measure of dividend policy is dividend payment status, which indicates whether the
acquirer is a dividend payer or not.5 The dividend payment is computed by noting at least one
regular dividend distribution in the year preceding the transaction in the CRSP–Compustat
Merged database.
Information asymmetry is unobservable, so the number of analysts following the acquirer in
the month before the acquisition serves as a proxy (Huddart and Ke, 2004; Krishnaswami and
Subramaniam, 1999; Thomas, 2002): The greater the number of analysts, the lower the
information asymmetry. The number of analysts is available in IBES summary data, rather
than requiring detailed data at the individual analyst level. Similar to Booth and Chang (2011)
and Chemmanur, Paeglis and Simonyan (2009), this study includes two other measures of
information asymmetry: analyst earnings forecast error and the dispersion of analyst earnings
forecasts. The forecast error is the absolute value of the difference between the acquirer’s
analyst earnings forecast, reported in IBES summary data, and the realized value of the
acquirer’s earnings, divided by the stock price. Higher forecast error indicates a higher level
of information asymmetry. The forecast dispersion is the standard deviation of the acquirer's
analyst earnings forecasts, in IBES summary data, for the last month of the fiscal year
5Booth and Chang (2011) use dividend status in their analysis of the dividend’s role in an
SEO setting. How, Kian and Peter (2011) assess the role of dividends in an IPO framework
using dividend initiation.
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preceding the acquisition announcement. Higher forecast dispersion implies less agreement
among analysts and thus a higher level of information asymmetry.
A standard event study methodology can compute outside investors’ reactions around the
announcement date (Brown and Warner 1985). The abnormal returns are estimated using the
market model:
𝑅𝑖𝑡 =∝𝑖 + 𝛽𝑖 𝑅𝑚𝑡 + 𝜀𝑖𝑡 (1)
where Rit is the logarithm return of firm i on day t, Rmt is the logarithm return of the market
index (CRSP value-weighted market index) on day t, ∝𝑖 and 𝛽𝑖 are the coefficients of the
ordinary least squares (OLS) model, and 𝜀𝑖𝑡 is the zero disturbance term with E(𝜀𝑖𝑡 ) = 0.
Expected returns are based on a 200−day window prior to the announcement [−250, −50].
Abnormal returns (ARit) are estimated as the difference between the expected return for time t
and the actual return of stock i for time t, as follows:
ARit = Rit − (∝𝑖 + 𝛽𝑖 𝑅𝑚𝑡 ) (2)
The three days (−1, +1), five days (−2, +2), and eleven days (−5, +5) around the
announcement date serve as event windows. These windows are appropriate because
sometimes the announcement occurs after trading hours; furthermore, information on
acquisitions may leak to the market a few days before the formal announcement. Therefore,
the CAR is the sum of all abnormal returns for the firm i (ARit) during the event window,
where time (t) 0 is the announcement date:
CARi = ∑+1
−1 𝐴𝑅 it (3)
To shed light on the impact of a dividend policy on announcement returns, it is necessary to
split the stock acquisitions into dividend and non-dividend versions. A univariate comparison

15

of acquirer abnormal returns between these two groups and a cross-sectional analysis of the
whole sample then can indicate whether the dividend policy of the acquirer reduces the
negative market reaction to the deal announcement.
IV. Results
Summary statistics
Table 1 reports the mean and median values of the variables for the whole sample of stock
acquisitions, as well as for subsamples defined by the acquirer’s dividend status. It compares
the characteristics of the dividend-paying acquirers with a matched sample of non–dividend-
paying acquirers. The variables are defined in the Appendix. Difference tests at the mean and
median also are provided. Panel A reports the statistics on deal characteristics. A low level of
competition is evident; only 5% of deals involve more than one bidder (Betton, Eckbo and
Thorburn, 2009). On average, competition is higher in cases of non–dividend-paying
acquisitions, and the difference is significant at a 0.05 confidence level. Furthermore, non–
dividend-paying acquirers tend to be more likely to acquire targets in the same industry (two-
digit SIC). Panel B contains the statistics about the acquirer’s characteristics for the total
sample and according to dividend status. Dividend-paying acquirers, on average, are less
leveraged and more profitable (ROA), with less growth (MTB), than non–dividend-paying
acquirers, and these differences are significant. This finding is consistent with evidence that
dividend payers tend to be more profitable, more mature, and less leveraged (Higgins, 1972;
Rozeff, 1982; Fama and French, 2001; Ben-David, 2010). The statistics in Panel C refer to the
target. Privately held targets are less frequent in the sample (34%). The average target run-up
is large (0.12), even though the only form of payment to target shareholders is stock (Schwert,
1996). Brigida and Madura (2012) assert that target firms with higher levels of asymmetric
information should experience more pronounced run-up. Finally, Panel D refers to the
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acquirer’s dividend measures. Dividend-paying acquirers constitute 30% of the total sample.
The average payout ratio of 39% among dividend-paying acquirers is consistent with
DeAngelo, DeAngelo and Skinner (2004), who find that the average payout ratio of CRSP
industrial firms in 2000 was 39.3%. The average dividend yield of 0.02 among dividend-
paying acquirers also is consistent with Dereeper and Turki’s (2016) finding of an average
dividend yield of dividend-paying acquirers over the three years preceding an acquisition
equal to 0.019.
[INSERT TABLE 1 HERE]
Univariate tests of the acquirer’s asymmetric information
Table 2 reports the means and medians for the information asymmetry variables according to
the dividend status of the acquirer, as well as the difference in means and medians between
the two subsamples. Because paying a dividend constitutes a costly signal, it should have
more information content than other measures. Therefore, a higher number of analysts, lower
forecast error, and lower forecast dispersion should emerge for dividend-paying acquirers
relative to non–dividend-paying acquirers. Consistent with this argument, Table 2 shows that
more analysts follow dividend-paying acquirers, and the difference is statistically significant.
The dispersion in analyst earnings forecasts is significantly more pronounced for non–
dividend-paying acquirers (significant at the 0.05 level). Although small, this difference
indicates that dividend payers involved in stock acquisitions offer less asymmetric
information, with more consensus about their valuation. Howe and Lin (1992) find that
dividend-paying stocks produce a significantly lower average bid-ask spread, such that the
magnitude of information asymmetry appears likely to be lower when the dividend is higher.
Booth and Chang (2011) find that the average logarithm of the number of analysts following
the stock in the month before an SEO announcement is significantly greater for dividend
SEOs than for non-dividend SEOs. They also note that the average dispersion in analyst

17

earnings forecasts (standard deviation of one-year-ahead earnings per share forecast, made in
the prior month, scaled by the current price) is lower for dividend SEOs. Yet Table 2 indicates
an insignificant difference in error forecasts between the two subsamples. The number of
analysts measure reveals a highly significant difference in information asymmetry between
subsamples, suggesting the need to control for the acquirer’s information asymmetry level
using this proxy in the cross-sectional analysis.
Univariate tests of the acquirer’s announcement returns
The abnormal return is the difference between the observed return and the expected return
from a market model. For the current purposes and following previous studies (Ang and
Cheng 2011), the CAR for this study is assessed using three event windows: CAR (−1, +1),
which is the CAR from one day before the stock acquisition announcement date to one day
after; CAR (−2, +2), from two days before the announcement date to two days after; and CAR
(−5, +5), captured from day –5 through day +5 around the announcement date.
Panel A of Table 3 reports on the univariate tests of the acquirer’s announcement returns,
according to target status, revealing a negative CAR for public targets and positive CAR for
private targets, consistent with the diversity-of-opinion model and information asymmetry
model. Announcement returns for stock acquisitions of public firms are negative due to the
diversity of opinions among investors and the information asymmetry level (Moeller,
Schlingemann, and Stulz, 2007). The significant comparison tests, depending on target status,
suggest the need to control for target status in the multivariate analysis. Panel B shows that
the average CAR (ACAR) captured by stock acquisitions is negative for both dividend-paying
and non–dividend-paying acquirers, consistent with the adverse selection argument of Myers
and Majluf (1984). That is, equity issues to uninformed target shareholders cause negative
18

market reactions because investors hedge against the possibility that the acquirer’s stock is
overpriced (see also Asquith, Bruner and Mullins, 1983; Travlos, 1987; Martin, 1996;
Servaes, 1991; Schlingemann, 2004). Panel C also reveals that dividend-paying acquirers’
CAR is less negative than that generated by non–dividend-paying acquirers (mean and
median differences are significant at 1% level for three-day and 10% for five-day and eleven-
day CARs). The CAR result thus align with the hypothesis that the dividend-paying acquirer
has less information asymmetry, so the market reacts less negatively to its stock acquisition
announcement. To extend the univariate results, a cross-sectional analysis of stock acquisition
announcement returns follows in the next section. Because differences in the mean and
median of CAR (−1, +1) are significant, this announcement return proxy provides the main
dependent variables.
Cross-sectional analysis of announcement returns
Table 4 contains the results of the cross-sectional analysis regressions of the acquirer’s share
price reaction to the stock acquisition announcement, assessed using CAR calculated over a
three-day window surrounding the acquisition announcement. The explanatory variable of
interest is dividend status. In line with previous empirical studies of acquirers’ short-run
abnormal returns, the acquirer’s return is regressed against the dividend status variable and a
set of control variables related to deal, acquirer, and target characteristics. The control
variables are similar to those used in prior studies (Betton, Eckbo and Thorburn, 2008a;
Officer, Poulsen, and Stegemoller, 2009). Model 1 regresses the three-day announcement
return on all variables except those related to the size of the acquirer. Model 2 regresses the
three-day announcement return on all variables except information asymmetry. Thus,
CARi = β0 + β1 DividendMeasurei + β2 NumberOfAnalystsi + β3 TargetStatusi + β4 Xi + εi (4)

19

where CARi denotes the acquirer’s cumulative abnormal return; DividendMeasurei is the
acquirer’s dividend measure; NumberOfAnalystsi is the acquirer’s information asymmetry
measure; TargetStatusi is the listing status of the target; Xi is a set of other acquirer-, target-,
and deal-specific characteristics; and εi is an error term. The regressions reveal positive,
highly significant coefficients of the dividend status variable, suggesting that the acquirer’s
dividend payment status significantly increases the wealth effect of its stock acquisition
announcement, as predicted. The number of analysts variable relates positively and
significantly to abnormal returns (Model 1); the lower the information asymmetry about the
acquirer’s stock, the greater its abnormal return around the stock acquisition announcement.
This result is consistent with Dierkens (1991), Moeller, Schlingemann, and Stulz (2007), and
Chemmanur, Paeglis and Simonyan (2009), joining them to support extant asymmetric
information models (Myers and Majluf, 1984; Hansen, 1987; Fishman, 1989). Models 1 and 2
also show that the private status of the target is positively and significantly associated with the
acquirer’s announcement return, which implies less information asymmetry about the private
target firm (Bradley and Sundaram, 2006) and downward price pressures, caused by short-
selling by the risk arbitragers around the announcement (Mitchell, Pulvino and Stafford,
2004). According to Faccio, McConnell and Stolin (2006), acquirers experience significantly
higher announcement returns when the target is private. Betton, Eckbo and Thorburn (2008d)
also find that firms acquiring private targets produce greater CAR in comparison with those
acquiring public targets. All significance tests in these models rely on robust standard errors,
adjusted for clustering.
The evidence shows that the acquirer’s dividend status matters in terms of redressing its
negative announcement–induced returns in stock-based acquisitions. This finding is consistent
with predictions of the information content of dividends, which reduce uncertainty about the

20

valuation of the acquirer’s stock used to pay for the acquisition. Booth and Chang’s (2011)
cross-sectional analysis to check for a statistical association between the firm’s dividend
status and its CAR in SEOs shows that dividend payers’ SEOs capture less negative
announcement returns, in line with the current findings. Furthermore, Jain, Shekhar and
Torbey (2003) find that dividend IPO firms capture higher returns relative to non-dividend
IPO firms. These overall findings support the valuation uncertainty argument, rather than the
free cash flow argument: Dividends solve information asymmetry about stock valuation, so
investors can react less negatively to stock issues in both IPO and SEO, as well as to the use
of stock as a payment method in stock offers.
The control variable coefficients for relative size are negatively and significantly associated
with the acquirer’s return. Betton, Eckbo and Thorburn (2008a) assert that the acquirer’s size
drives negative acquirer return, and Loderer and Martin (1990) indicate that acquirer
announcement returns are smaller for larger acquirers and decrease with the relative size of
the target. However, Asquith, Bruner and Mullins (1983) find that the acquirer’s returns
increase with the ratio of the target’s equity capitalization to the acquirer’s equity
capitalization. Competition, proxied by multiple bidders, has a negative and significant
coefficient; the greater the number of potential rival bidders, the smaller the abnormal returns
captured by the acquirer around the announcement, in accordance with Fishman’s (1989)
preemptive bidding theory. Among the explanatory variables related to the acquirer, the data
indicate a negative, significant coefficient of the acquirer’s MTB ratio, that is, a negative
wealth effect of the acquirer’s equity misvaluation, because the MTB ratio offers a reliable
proxy for market overvaluation (Ang and Cheng, 2006; Dong et al., 2006; Martin, 1996; Rau
and Vermaelen, 1998; Rhodes-Kropf, Robinson and Viswanathan, 2005). The coefficient for
the acquirer’s leverage is insignificant, which is surprising in light of Maloney, McCormick

21

and Mitchell’s (1993) results, though Moeller, Schlingemann, and Stulz (2004) find an
insignificant relationship between the acquirer’s leverage and its announcement of abnormal
returns. The coefficients of the variables related to the target align with previous evidence.
Target run-up has a positive and significant coefficient, such that the acquirer’s gains increase
in the target run-up, in line with Betton, Eckbo and Thorburn’s (2008c) finding that takeovers
with greater target run-ups are more profitable for acquirers. A greater target run-up is
associated with markup pricing and greater acquirer synergy from the acquisition. The
explanatory power of the regressions is low, which is not unusual for cross-sectional
regressions of acquirer abnormal returns (Chang, 1998; Travlos, 1987). To control for year
and industry fixed effects, all regressions in Table 4 were re-run after including these effects,
either simultaneously or separately. Doing so does not materially change the size or statistical
significance of the estimated coefficients.
V. Robustness checks
Four robustness checks seek to determine whether:
1. Dividend payment trends over the sample period affect the main findings.
2. Alternative dividend measures, such as changes in the dividend or amount of the
dividend, affect acquirer announcement returns.
3. The informational content of the dividend still matters for cash acquisitions.
4. A self-selection issue arises, in that acquirers choose to pay dividends, so the sample
of dividend-paying acquirers may not be random.
Control for dividend payment activity over the sample period
According to Figure 1, the percentage of acquirers that pay dividends declines between 1985
and 2002, consistent with Fama and French (2001). During 2003–2013, the trend reverses,
22

consistent with Floyd et al. (2015), so it is necessary to control for the effect of the dividend
payment activity over the sample period. Similar to Booth and Chang (2011), this test of the
effect of dividend payment activity over the sample period involves a cross-sectional analysis
of announcement returns for two subperiods: 1985–2002 and 2003–2013. Table 5 contains the
coefficients of the acquirer’s dividend status, which are economically and statistically more
significant for regressions conducted on acquisitions announced between 1985 and 2002 than
for those conducted on acquisitions announced during 2003–2013. In 1985–2002, the
information asymmetry measure (i.e., number of analysts) is positively, significantly
associated with acquisition returns. Consistent with the results in Table 4, the relative size of
the target and competition negatively affect acquisition returns; the target’s private status
positively influences them. In 2003–2013, other than the acquirer’s dividend status, the other
variables exert similar effects on announcement returns. Therefore, the dividend payment
tends to be less informative after 2002, and it reduces uncertainty about the value of the stock
acquirer less than it does during 1985–2002. Similarly, Floyd et al. (2015) find that dividends
paid by industrial firms can be explained better by the agency costs of free cash flows than by
signals of financial strength.
Control for other dividend measures: dividend changes and dividend amount
Dividend changes are important payout factors that may affect a firm’s investment decision.
Benartzi, Michaely and Thaler (1997) argue that dividend changes provide information about
future earnings and show that a dividend increase is followed by significant positive excess
returns. According to Allen and Michaely (2003), investors react favorably to dividend
increases and negatively to dividend decreases. Michaely, Thaler and Womack (1995) also
show that dividend initiation is associated with a stock price increase. Booth and Chang
(2011) find that SEO announcement returns are positively associated with a stable or

23

increased dividend. Thus, the dividend increase, dividend no-change, and dividend initiation
dummies should be positive and significant, in contrast with dividend decrease. Table 6
reports the regression results (Models 1–2). Consistent with prior studies, the dividend
increase and dividend initiation dummies are positive and statistically significant. However,
stable dividends and decreased dividends do not significantly affect investors’ reactions to
stock acquisition announcements.
Many firms decide on their dividend policy in terms of the dividend amount, so this measure
also may be relevant. DeAngelo, DeAngelo and Skinner (2004) show that the aggregate
dividend paid by industrial firms has increased since the 1980s, though the number of payers
has decreased, according to Fama and French (2001). Li and Zhao (2008) argue that firms
with less information asymmetry likely to pay higher dividends, and Booth and Chang (2011)
accordingly show that the dividend amount scaled by the firm’s assets affect SEO
announcement returns positively and significantly. The dividend amount can be estimated as
the sum of the dividend in the year before the acquisition announcement, scaled by total
assets. In the regression results in Table 6, regressions 3 and 4 indicate positive and
statistically significant coefficients of the dividend amount, at a 10% confidence level. This
finding is consistent with Li and Zhao (2008) and confirms the key result of the current study.
Control for informational difference of dividends between cash acquisitions and stock
acquisitions
If acquirer’s dividends solve an informational problem about the acquirer’s market value and
thus its stock value, a comparison of the information content of the dividends for stock versus
cash acquisitions would be relevant. According to the argument that dividend payments can
reduce uncertainty about the valuation of the acquirer, the impact of the information content

24

of dividends should be similar for stock acquisitions and cash acquisitions. Yet stock
acquisitions usually lead to more pronounced negative announcement returns, due to negative
reactions by investors who are uncertain about the true value of the stock used to pay for the
transaction. According to the stock-market–driven acquisition hypothesis (Shleifer and
Vishny 2003), acquirers have powerful incentives to make acquisitions with stock if their
shares are misvalued. Furthermore, Grinblatt and Titman (2002) state that the market reacts
positively to announcements of a cash offer, because better informed investors are more
confident about the firm’s ability to raise cash for the acquisition. This effect could arise even
if a dividend-paying acquirer pays for the acquisition with stock, because the dividend
payment provides information about the acquirer’s ability to raise cash. Thus, the coefficient
of the dividend status dummy may be economically significant for cash acquisitions, in
connection with the announcement returns for the acquirer, but less than it would be for stock
acquisitions.
To test this prediction, the cross-sectional regressions of announcement returns in Table 4 can
be applied to a sample of cash-based acquisitions. The additional data extraction to support
this robustness check relied on the same sample construction methodology used to obtain the
main sample, except that the payment method criterion (in SDC Platinum Database) is cash
instead of common stock. The sampling procedure identifies 453 cash deals. Table 7 reports
the regression results (Models 3 and 4). In contrast with the proposed effect, the coefficients
of the dividend status dummy are not significant, yet this result is unsurprising. Issuing
misvalued stock as a method of payment and the negative impact on acquirer returns around
the announcement relates only to acquisitions paid for in stock (Travlos, 1987; Betton and
Eckbo, 2000; Chemmanur, Paeglis and Simonyan, 2009).

25

In addition, the significant coefficient of dividend status for stock acquisitions could be due to
other explanations. Empirical mergers-and-acquisitions literature estimates wealth effects
(i.e., CAR), especially for the target firm, by assessing whether target shareholders receive
fair compensation from the transactions. This compensation may take the form of a higher
premium: Wansley, Lane and Yang (1983) and Huang and Walking (1987) show that lower
target premiums in stock acquisitions are associated with more negative acquirer
announcement returns. It also could appear as a higher future dividend: Hartzell, Ofek and
Yermack (2004) show that target shareholders are willing to accept smaller acquisition
premiums if they receive sufficient other benefits. According to Turki and Dereeper (2017),
target shareholders paid in cash miss out on the higher dividend of the combined entity, so
they need to be compensated at the time of the transaction, with a higher premium. Firms that
pay dividends and use their stock as a method of payment in an acquisition thus could offer
higher compensation, which in turn may explain the higher CAR observed in Table 7 for the
sample of stock acquisitions. However, this argument holds only if the wealth effect evaluated
using CAR accrues to the target, which is not the case in the current analysis. Moreover, and
in line with Dereeper and Turki (2016), a higher post-merger dividend is not obvious; the
dividend policy following a merger reflects the prior policy of the target, particularly in all-
stock deals, in line with the idea that managers of the acquirer firm adjust their post-merger
dividend, either upward or downward, to cater to target shareholders who have integrated the
company’s shareholding.
Self-selection model
Recent studies of acquisition announcement returns may have increased the general
awareness of the importance of providing unbiased estimates, suggesting the need for caution
in interpreting the significant coefficient of dividend status in Table 4. Similar acquirers’

26

characteristics also could determine their dividend payment status. Empirical research reveals
that factors such as maturity, size, leverage, and reduced investment opportunities tend to
favor dividends (Brav et al., 2005; Grullon and Michaely, 2002; Jagannathan, Stephens and
Weisbach, 2000; Skinner, 2008). Fama and French (2001) find that larger, more profitable
firms with lower investment opportunities are more likely to pay dividends. The error term in
the current cross-sectional model therefore may be correlated with whether an acquirer pays
dividends, which may bias the coefficient estimate for the dividend status variable. To
establish the validity of the results, it is necessary to check for the sensitivity of the OLS
model to a self-selection bias (i.e., stock acquirers choose to pay dividends, so the sample of
dividend-paying acquirers is not random). Specifically, a subsample comprises stock
acquirers that self-select choice PD to pay dividends, and Equation (4) becomes:
CARi|PD = β0 + β1 DividendMeasurei + β2 NumberOfAnalystsi + β3 TargetStatusi + β4 Xi
+εi|PD (5)
The difference between Equations (4) and (5) is the heart of the self-selection problem: If
self-selecting acquirers are not random subsets of the population, the cross-sectional
estimators applied to Equation (5) are not consistent. Li and Prabhala (2007) provide an
overview of the self-selection model applied to corporate finance, noting that early corporate
finance applications of self-selection rely on the model analyzed in Heckman (1979). The
current analysis also uses the Heckman (1979) selection model, in which the first equation is a
probit model with acquirer dividend status as a dependent variable (selection equation). This
probit model produces an inverse Mill’s ratio (Lambda), which is the non-selection hazard.
The second equation then regresses the three-day acquirer abnormal returns on the control
variables and the inverse Mill’s ratio (observation equation). An important issue is the choice
of instruments for both selection and observation equations. Greene (2011) suggests including

27

exogenous characteristics that affect the selection equation, because they are less likely to
affect the observation equation. As in Booth and Chang (2011), the industry percentage of
dividend payers in a year serves as the instrument variable, motivated by the likely effect of
dividend distribution behavior and payment trends in the sector on the dividend policy of the
firm. Dividend payment is not homogeneous across industries, and the percentage of dividend
payers in an industry tends to have a positive effect on the decision to pay a dividend. Yet the
portion of payers within an industry is unlikely to affect the announcement returns of the
acquirer in the observation equation. A priori, the instrument variable chosen should not have
a significant impact on stock price reactions to stock acquisitions announcements, so it offers
a suitable instrument for the current research design (see Rosen and Willis, 1979; Dutordoir
and Hodrick, 2012). In line with Li and Prabhala’s (2007) notation, the structural self-
selection model features the selection variable Si as a function of the explanatory variables Ei,
which are assumed to be exogenous. The complete model is:
C = PD Si = Ei γ + δ(CARPD,i - CARNPD,i) + ηi > 0 (6)
C = NPD Si = Ei γ + δ(ACARPD,i - ACARNPD,i) + ηi ≤ 0 (7)
ACARPD,i = βPD,0 + βPD,1 DivStatusPD,i + βPD,2 XPD,i + εPD,i, and (8)
ACARNPD,i = βNPD,0 + βNPD,1 DivStatusNPD,i + βNPD,2 XNPD,i + εNPD,i (9)
where C is an element of {PD, NPD}: PD if the acquirer is a dividend payer and NPD if the
acquirer is a nonpayer; Ei denotes acquirer characteristics that influence its dividend payment
status; γ is a vector of probit coefficients; δ(ACARPD,i - ACARNPD,i) is the outcome gain from
choosing PD over NPD in the selection decision; and ηi is orthogonal to the variables Ei.
Table 8 presents the results for the effect of selection bias on the acquirer’s dividend status.
As expected (Fama and French, 2001; Grullon and Michaely, 2002), the probit model
estimates show that the acquirer’s ROA and MTB ratio are significantly associated with the
decision to pay dividends; that is, the acquirers more likely to pay dividends are those firms

28

with higher profitability and lower investment opportunities. They are the least likely to face
substantial information asymmetry too (Khang and King, 2006). In addition, an industry
effect surfaces, in that firms are more reluctant to pay dividends if the percentage of dividend
payers in the same industry is high. The influence of self-selection is captured by the inverse
Mill’s ratio (Lambda). The OLS regression indicates a significant Lambda coefficient, in that
the error terms in the selection and primary equations correlate positively. The determinants
that characterize firms facing less information asymmetry and that make the firm’s dividend
payment more likely thus tend to be associated with higher acquirer announcement returns.
These results confirm the main findings. They are also robust to the instrument variable
chosen; including the industry percentage of dividend payers in a year does not bias the
findings through its potential simultaneity with the dividend payment decision.
VI. Conclusion
Dividend payers produce less information asymmetry than non-payers. Using an information
asymmetry approach, this article explores the relationship between dividend policy and
announcement returns to stock-based acquisitions using a sample of 711 deals announced
between 1985 and 2013. The main research question suggests that the dividend policy of the
acquirer may reduce the negative market reaction to stock acquisition announcement.
Significantly different announcement effects arise between dividend-paying and non–
dividend-paying acquirers. These findings indicate that the acquirer dividend payment
positively affects abnormal returns to its equity upon an announcement, consistent with the
idea that the acquirer’s dividend payment policy reduces information asymmetry about its
valuation around the announcement of stock-based acquisitions. This result holds even in the
face of various robustness checks. Therefore, investors are aware of dividends’ contributions
to alleviating the misvaluation of the stock used to pay for acquisitions. A robustness check
29

with cash acquisitions shows that dividends cannot resolve stock valuation uncertainty for
cash payments, because the misvaluation of the stock used as a method of payment and its
negative announcement returns are not at stake in cash-based acquisitions. The evidence that
dividend payment status matters for stock acquisition announcement returns is novel.
Although the current study provides such useful insights, the results also are limited by the
research data and design. First, as in previous studies of dividends’ impact on announcement
returns, the variables suffer limitations. Dividend status, changes in dividends, and dividend
amount variables do not capture the acquirer’s dividend policy completely; other measures
such as the speed of adjustment could be included in further analyses. Second, a gap persists
with regard to explaining the insignificant impact of the information content of dividends on
cash acquisitions’ announcement returns. Third, another gap is apparent, related to the impact
of a payout policy on short-run acquisition returns. Even if dividends are paid by a much
smaller percentage of firms today, share repurchases may be an important payout decision
that could affect investors’ reactions to stock acquisition announcements. Further research
might examine whether the acquirer’s buyback policy affects its abnormal returns around the
announcement. Fourth, the dividend policy of the acquirer also might affect target or overall
announcement returns. Because dividends mitigate information asymmetry, analyzing their
impact on overall returns is possible, and it could provide a more accurate assessment of their
impact on market reactions to acquisition announcements. Fifth, analyzing the impact of the
acquirer’s dividend policy on short-run returns might be an important preliminary step to
investigate the impact on the acquirer’s long-run performance. How et al. (2011) find that IPO
firms that initiate dividends perform significantly better five years after the initiation date.
Thus, continued research might test whether dividend-paying stock acquirers outperform
non–dividend-paying stock acquirers, in accordance with an information asymmetry

30

approach. Overall, it may be worthwhile to conduct dynamic, empirical analyses that
incorporate time perspectives with long-run data, other payouts, and market reaction
measures.
Appendix. Variable definitions

Variable Definition
A1. Dividend policy measures
A dummy variable that equals 1 if at least one regular dividend
distribution is present over the year preceding the transaction and 0
Dividend status
otherwise. Information on dividends is available in CRSP-
Compustat Merged database.
Dividend increase A dummy variable that equals 1 if the firm increases the dividend
on the last declaration date before the acquisition announcement.
Information on dividends is available in CRSP-Compustat Merged
database.
Dividend decrease A dummy variable that equals 1 if the firm decreases the dividend
on the last declaration date before the acquisition announcement.
database.
Dividend no-change A dummy variable that equals 1 if the firm doesn’t change the
dividend on the last declaration date before the acquisition
announcement. Information on dividends is available in CRSP-
Compustat Merged database.
Dividend initiation A dummy variable that equals 1 if the firm initiates a dividend on
the last declaration date before the acquisition announcement.
database.
Dividend amount Dividend amount is the sum of dividend in the year before the
acquisition announcement scaled by total assets. Information on
dividends is available in CRSP-Compustat Merged database.
A2. Asymmetric information measures
Number of analysts The number of analysts following the acquirer in the month before
the acquisition, as reported by IBES summary data.
Forecast error The absolute value of the difference between the acquirer’s analyst
earnings forecast reported by IBES summary data and the realized
value of acquirer’s earnings, divided by the stock price.
Forecast dispersion The standard deviation of acquirer's analyst earnings forecasts as
reported by IBES summary data for the last month of the fiscal
year preceding the acquisition announcement.
A3. Announcement return measures
ACAR (–1, +1) The average cumulative abnormal return of acquirers, estimated as
the mean of acquirers’ cumulative abnormal returns, which are the
sum of abnormal returns for the acquirer i (ARit) during the event

31

window (–1, +1); that is, abnormal returns that are captured from
day –1 through day +1 around the announcement date of the
transaction. Market model parameters are estimated over a 200-
day interval (from day –250 to day –50), using benchmark returns
of CRSP value-weighted market index.
transaction.
transaction.
A4. Control variables
Relative size Ratio of target total assets to acquirer total assets.
Toehold A dummy variable that equals 1 if the acquirer holds any shares of
the target before the announcement date and 0 otherwise.
Tender A dummy variable that equals 1 for tender offers, and 0 otherwise.
Multiple bidders A dummy variable that equals 1 for deals involving more than one
bidder, and 0 otherwise.
Hostile A dummy variable that equals 1 for hostile deals and 0 otherwise.
M&A activity A dummy variable that equals 1 for deals announced between
1998 and 2001, and 0 otherwise (Moeller, Schlingemann, and
Stulz, 2005).
Horizontal A dummy variable that equals 1 for horizontal deals (which
involve firms with the same two-digit SIC codes) and 0 otherwise.
Leverage Liabilities/common equity.
ROA Earnings before interest, taxes, depreciation, and amortization
(EBITDA)/total assets.
MTB ratio Number of shares outstanding  stock price close/common equity.
Cash ratio Total cash/total assets.
Private target Dummy variable that equals 1 if the target is privately held and 0
otherwise.
Run-up Cumulative stock price return of the target over the year preceding
the announcement.
Industry percentage of Percentage of dividend paying acquirers in the same two-digit SIC
dividend payers industry in a year.

32

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40

Figure I. Distribution of stock acquisitions and dividend-paying acquirers by calendar

year.
80 70
Number of stock acquisitions
70 60
60
Percent of payers
50
50
40
40
30
30
20
20
10 10
0 0
1980 1985 1990 1995 2000 2005 2010 2015

41

TABLE 1. Summary Statistics and univariate tests of variables

Variable Total sample (N Non–dividend- Dividend- Difference
= 711) paying paying
acquirers (N = acquirers (N =
496) 215)
Mean Median Mean Median Mean Median Mean Median
Panel A. Deal characteristics
Relative size 0.49 0.26 0.45 0.22 0.52 0.30 −0.07 −0.08
(−0.27) (−0.69)
Toehold 0.11 0.00 0.09 0.00 0.12 0.00 −0.03 0.00
(−0.89) (0.54)
Tender 0.17 0.00 0.21 0.00 0.15 0.00 0.06 0.00
(1.12) (1.01)
Multiple 0.05 0.00 0.06 0.00 0.03 0.00 0.03** 0.00**
bidders (1.98) (2.21)
Hostile 0.04 0.00 0.05 0.00 0.03 0.00 0.02 0.00
(0.67) (0.77)
Horizontal 0.59 1.00 0.62 1.00 0.54 1.00 0.08* 0.00*
(1.74) (1.63)
Panel B. Acquirer characteristics
Leverage 2.51 1.76 2.86 1.84 2.32 1.66 0.54*** 0.18**
(2.97) (2.29)
ROA 0.19 0.16 0.16 0.13 0.22 0.18 −0.06*** −0.05***
(−2.89) (−3.87)
MTB ratio 3.25 2.34 4.87 3.55 3.99 2.76 0.88** 0.79**
(1.95) (2.26)
Cash ratio 0.15 0.09 0.14 0.07 0.16 0.09 −0.02 −0.02
(−1.36) (−1.15)
Panel C. Target characteristics
Leverage 2.11 1.43 2.33 1.65 2.01 1.34 0.32 0.31
(0.98) (1.23)
ROA 0.27 0.22 0.29 0.23 0.26 0.19 0.03* 0.04*
(1.67) (1.75)
MTB ratio 2.74 1.77 2.54 1.67 3.42 1.98 −0.88* −0.31
(−1.67) (−0.98)
Cash ratio 0.18 0.11 0.19 0.10 0.16 0.08 0.03 0.02
(0.37) (1.10)
Private target 0.34 0.00 0.37 0.00 0.31 0.00 0.06 0.00
(1.34) (0.78)
Run-up 0.12 0.03 0.11 0.03 0.13 0.04 −0.02 −0.01
(−1.16) (−1.44)
Panel D. Acquirer dividend policy
Dividend 0.30 0.00 0.00 0.00 1.00 1.00 −1.00*** −1.00***
status (−5.07) (−6.12)
Note: This table contains the mean and median of variables for total sample (N = 711), the
mean and median of variables for subsamples of non-dividend-paying acquirers (N = 496)
and dividend-paying acquirers (N = 215), and univariate tests using differences in the mean
and median. An acquirer is categorized as dividend paying if at least one dividend distribution
is present in the year preceding the acquisition and non–dividend-paying otherwise. Panel A
42

refers to the deal’s characteristics; Panel B to the acquirer’s characteristics; Panel C to the
target’s characteristics; and Panel D refers to the acquirer’s dividend policy. The results of the
t-tests for the difference in means and Wilcoxon rank tests for the difference in medians are in
parentheses. N denotes sample/subsample size. “Relative size” is the ratio of target total
assets to acquirer total assets. “Toehold” is a dummy variable that equals 1 if the acquirer
holds any shares of the target before the announcement date and 0 otherwise. “Tender” is a
dummy variable that equals 1 for tender offers, and 0 otherwise. “Multiple bidders” is a
dummy variable that equals 1 for deals involving more than one bidder, and 0 otherwise.
“Hostile” is a dummy variable that equals 1 for hostile deals and 0 otherwise. “Horizontal” is
a dummy variable that equals 1 for horizontal deals (which involve firms with the same two-
digit SIC codes) and 0 otherwise. “Leverage” is the liabilities scaled by common equity.
“ROA” is the earnings before interest, taxes, depreciation, and amortization (EBITDA)
divided by total assets. “MTB ratio” equals the number of shares outstanding times the stock
price close scaled by common equity. “Cash ratio” is the total cash divided by total assets.
“Private target” is a dummy variable that equals 1 if the target is privately held and 0
otherwise. “Run-up” is the cumulative stock price return of the target over the year preceding
the announcement. “Dividend status” is a dummy variable that equals 1 if at least one regular
dividend distribution is present over the year preceding the transaction and 0 otherwise.
***Significant at the 1% level.
**Significant at the 5% level.
*Significant at the 10% level.

43

TABLE 2. Univariate tests of acquirer’s asymmetric information
Non–dividend-paying Dividend-paying Difference

acquirers (N = 496) acquirers (N = 215)
Mean Median Mean Median Mean Median
Number of –2.15*** –2.00***
9.29 9.00 11.44 11.00
analysts (–3.87) (–2.73)
Forecast error 0.02 0.00 0.01 0.00 0.01 0.00
(0.89) (1.34)
Forecast 0.06 0.02 0.05 0.01 0.01** 0.01
dispersion (2.13) (1.31)
Note: This table provides the mean and median of asymmetric information measures of the
acquirer according to its dividend status and univariate tests of the differences in means and
medians. An acquirer is categorized as dividend paying if at least one dividend distribution is
present in the year preceding the acquisition and non–dividend-paying otherwise. The results
of the t-tests for the difference in means and Wilcoxon rank tests for the difference in medians
are in parentheses. N denotes sample/subsample size. “Number of analysts” is the number of
analysts following the acquirer in the month before the acquisition, as reported by IBES
summary data. “Forecast error” is the absolute value of the difference between the acquirer’s
analyst earnings forecast reported by IBES summary data and the realized value of acquirer’s
earnings, divided by the stock price. “Forecast dispersion” is the standard deviation of
acquirer's analyst earnings forecasts as reported by IBES summary data for the last month of
the fiscal year preceding the acquisition announcement.

44

TABLE 3. Univariate tests of acquirer’s announcement returns
Panel A. Univariate tests of acquirer’s announcement returns according to target status

Public targets (N = Private targets (N = Difference
469) 242)
CAR (–1, +1) – – –
–0.018** 0.019** 0.016**
0.022*** 0.041*** 0.034***
(–2.05) (2.10) (1.98)
(–3.17) (–4.56) (–3.87)
CAR (–2, +2) –
–0.025* –0.017* 0.020* 0.018 –0.035**
0.045***
(–1.66) (–1.75) (1.67) (1.43) (–2.14)
(–2.75)
CAR (–5, +5) –0.018** –0.014* 0.017 0.015* –0.035** –0.029**
(–2.14) (–1.71) (1.29) (1.73) (–1.98) (–1.99)
Panel B. Univariate tests of acquirer’s announcement returns according to acquirer’s dividend

status
Non–dividend-paying Dividend-paying Difference

acquirers (N = 496) acquirers (N = 215)
CAR (–1, +1) – –
–0.023** –0.023* –0.013** –0.014**
0.010*** 0.009***
(–2.00) (–1.74) (–2.05) (–2.13)
(–2.66) (–2.71)
CAR (–2, +2) –0.022 –0.019* –0.019** –0.015* –0.003* –0.004**
(–0.98) (–1.72) (–2.23) (–1.68) (–1.65) (–2.21)
CAR (–5, +5) –0.017* –0.012** –0.009* –0.009 –0.008* –0.003*
(–1.69) (–2.17) (–1.67) (–0.14) (–1.71) (–1.69)
Note: This table provides the mean and median of the acquirer’s cumulative abnormal return
(CAR) and univariate tests of the differences in means and medians. Panel A reports the
acquirer’s CAR according to the target status and univariate tests of the differences in means
and medians. Panel B reports it according to the acquirer’s dividend status and univariate tests
of the differences in means and medians. An acquirer is categorized as dividend paying if at
least one dividend distribution is present in the year preceding the acquisition and non–
dividend-paying otherwise. ACAR (–1, +1) is the average cumulative abnormal return of
acquirers, estimated as the mean of acquirers’ cumulative abnormal returns, which are the
sum of abnormal returns for the acquirer i (ARit) during the event window (–1, +1); that is,
abnormal returns that are captured from day –1 through day +1 around the announcement date
of the transaction. Market model parameters are estimated over a 200-day interval (from day
–250 to day –50), using benchmark returns of CRSP value-weighted market index. ACAR (–
2, +2) is the average cumulative abnormal return of acquirers, estimated as the mean of
acquirers’ cumulative abnormal returns, which are the sum of abnormal returns for the
acquirer i (ARit) during the event window (–2, +2); that is, abnormal returns that are captured
from day –2 through day +2 around the announcement date of the transaction. ACAR (–5, +5)
is the average cumulative abnormal return of acquirers, estimated as the mean of acquirers’
cumulative abnormal returns, which are the sum of abnormal returns for the acquirer i (ARit)
during the event window (–5, +5); that is, abnormal returns that are captured from day –5
through day +5 around the announcement date of the transaction. The results of the t-tests for

45

the mean and the difference in means and Wilcoxon rank tests for the median and the
difference in medians are in parentheses. N denotes sample/subsample size.

46

TABLE 4. Cross-sectional regression of announcement returns

47

Note: This table presents the results of the announcement returns’ regression on the acquirer’s
dividend status and a set of control variables relative to the deal, acquirer and target
Dependent variable CAR (–1, +1)
(1) (2)
Constant –0.029* –0.031*
Variable of interest
Dividend status 0.012** 0.010**
(2.01) (1.98)
Deal characteristics
Relative size – –0.011**
(–2.10)
Toehold 0.005 0.006
(0.77) (1.13)
Multiple bidders –0.003*** –0.004***
(–3.21) (–3.62)
Hostile 0.011 0.012
(1.44) (1.31)
Tender 0.005 0.005
(1.23) (1.29)
Horizontal 0.009 0.010
(1.05) (1.13)
M&A activity 0.049 0.063
(0.64) (0.55)
Acquirer characteristics
Number of analysts 0.001* –
(1.74)
Leverage 0.011 0.012
(1.09) (1.22)
ROA –0.012 –0.015
(–1.34) (–1.63)
MTB ratio – –0.003*
(–1.78)
Cash ratio 0.001 0.001
(0.74) (0.91)
Target characteristics
(1.21) (0.87)
ROA 0.001 0.001
(1.21) (1.45)
MTB ratio –0.001 –0.001
(–0.84) (–1.04)
(1.19) (1.41)
Private target 0.004*** 0.005***
(2.93) (3.21)
Run-up 0.011* 0.010**
(1.77) (1.98)
Number of observations 711 711
Adjusted R2 0.06 0.08
This article is protected by copyright. All 6.84
F-statistic rights reserved. 7.31
48

characteristics. The dependent variable is “CAR (–1, +1)”, which represents the cumulative
abnormal return of the acquirer for a three-day event window, centered on the announcement
date. The CAR is estimated using Brown and Warner’s (1985) standard event study
methodology. “Dividend status” is a dummy variable that equals 1 if at least one regular
dividend distribution is present over the year preceding the transaction and 0 otherwise.
“Relative size” is the ratio of target total assets to acquirer total assets. “Toehold” is a dummy
variable that equals 1 if the acquirer holds any shares of the target before the announcement
date and 0 otherwise. “Multiple bidders” is a dummy variable that equals 1 for deals involving
more than one bidder, and 0 otherwise. “Hostile” is a dummy variable that equals 1 for hostile
deals and 0 otherwise. “Tender” is a dummy variable that equals 1 for tender offers, and 0
otherwise. “Horizontal” is a dummy variable that equals 1 for horizontal deals (which involve
firms with the same two-digit SIC codes) and 0 otherwise. “M&A activity” is a dummy
variable that equals 1 for deals announced between 1998 and 2001, and 0 otherwise. “Number
of analysts” is the number of analysts following the acquirer in the month before the
acquisition, as reported by IBES summary data. “Leverage” is the liabilities scaled by
common equity. “ROA” is the earnings before interest, taxes, depreciation, and amortization
(EBITDA) divided by total assets. “MTB ratio” equals the number of shares outstanding
times the stock price close scaled by common equity. “Cash ratio” is the total cash divided by
total assets. “Private target” is a dummy variable that equals 1 if the target is privately held
and 0 otherwise. “Run-up” is the cumulative stock price return of the target over the year
preceding the announcement. The t-statistics are reported in parentheses. All significance tests
rely on robust standard errors (cluster−adjusted). The F-statistic and the adjusted R-square
measure the goodness-of-fit.
TABLE 5. Testing for dividend payment activity over the sample period
1985 - 2002 2003 - 2013
49

(1) (2) (3) (4)

Constant –0.022* –0.025** –0.015* –0.019*
Dividend status 0.012*** 0.013** 0.011 0.009*
(2.76) (2.15) (1.43) (1.80)
Relative size – –0.010*** – –0.011*
(–2.85) (–1.79)
Toehold 0.002 0.004 0.005 0.004
(1.22) (1.31) (0.63) (1.19)
Multiple bidders –0.003*** –0.003*** –0.002*** –0.003***
(–2.98) (–3.11) (–2.65) (–2.69)
Hostile 0.010 0.011 0.012 0.009
(1.10) (1.17) (0.71) (0.87)
Tender 0.006 0.005 0.005 0.003
(1.11) (1.34) (1.35) (1.09)
Horizontal 0.008 0.010 0.009 0.009
(1.41) (0.76) (1.31) (1.28)
M&A activity 0.051 0.048 0.044* 0.045
(0.89) (1.22) (1.76) (1.55)
Number of analysts 0.001** – 0.001** –
(2.21) (2.18)
Leverage 0.011 0.011 0.009 0.010
(0.65) (0.87) (1.09) (1.13)
ROA –0.010 0.015 0.009 0.009
(–1.06) (0.76) (1.14) (1.21)
MTB ratio – –0.003 – –0.002
(–1.43) (–1.08)
Cash ratio 0.001 0.001 0.001 0.001
(1.05) (0.77) (1.13) (0.98)
Leverage 0.005* 0.003 0.004 0.004
(1.76) (1.51) (1.33) (1.42)
ROA 0.001 0.001 0.001 0.001
(1.16) (1.32) (0.88) (1.11)
MTB ratio 0.001 –0.001 –0.001 –0.001
(1.32) (–0.87) (–1.22) (–1.06)
Cash ratio 0.011 0.025 0.031 0.032
(1.09) (1.53) (1.20) (1.35)
Private target 0.004*** 0.005*** 0.004** 0.004**
(3.12) (3.54) (2.10) (2.21)
Run-up 0.010* 0.010* 0.012 0.011*
(1.81) (1.76) (0.87) (1.83)
Number of observations 569 569 142 142
2
Adjusted R 0.09 0.08 0.04 0.06
F-statistic 6.76 8.45 6.33 7.24
50

methodology. Models 1 – 2 are based on the 1985-2002 period (N=569). Models 3 – 4 are
based on the 2003-2013 period (N=142). “Dividend status” is a dummy variable that equals 1
if at least one regular dividend distribution is present over the year preceding the transaction
and 0 otherwise. “Relative size” is the ratio of target total assets to acquirer total assets.
“Toehold” is a dummy variable that equals 1 if the acquirer holds any shares of the target
before the announcement date and 0 otherwise. “Multiple bidders” is a dummy variable that
equals 1 for deals involving more than one bidder, and 0 otherwise. “Hostile” is a dummy
variable that equals 1 for hostile deals and 0 otherwise. “Tender” is a dummy variable that
equals 1 for tender offers, and 0 otherwise. “Horizontal” is a dummy variable that equals 1 for
horizontal deals (which involve firms with the same two-digit SIC codes) and 0 otherwise.
“M&A activity” is a dummy variable that equals 1 for deals announced between 1998 and
2001, and 0 otherwise. “Number of analysts” is the number of analysts following the acquirer
in the month before the acquisition, as reported by IBES summary data. “Leverage” is the
liabilities scaled by common equity. “ROA” is the earnings before interest, taxes,
depreciation, and amortization (EBITDA) divided by total assets. “MTB ratio” equals the
number of shares outstanding times the stock price close scaled by common equity. “Cash
ratio” is the total cash divided by total assets. “Private target” is a dummy variable that equals
1 if the target is privately held and 0 otherwise. “Run-up” is the cumulative stock price return
of the target over the year preceding the announcement. The t-statistics are reported in
parentheses. All significance tests rely on robust standard errors (cluster−adjusted). The F-
statistic and the adjusted R-square measure the goodness-of-fit.
TABLE 6. Testing for dividend changes and dividend amount

Dividend changes Dividend amount
51

(1) (2) (3) (4)

Constant –0.013* 0.019 –0.007** –0.021*
Variables of interest
Dividend increase –0.009 0.011* – –
(–1.23) (1.79)
Dividend decrease 0.009 –0.006 – –
(1.19) (–1.24)
Dividend no-change 0.013 0.012 – –
(0.98) (1.24)
Dividend initiation 0.011* 0.010 – –
(1.84) (0.88)
Dividend amount – – 0.232* 0.245*
(1.79) (1.83)
Relative size – –0.009*** – –0.012***
(–3.10) (–2.85)
Toehold 0.003 0.003 0.004 0.003
(0.76) (1.22) (1.12) (1.04)
Multiple bidders –0.002** –0.003*** –0.004*** –0.004***
(–2.10) (–2.81) (–2.85) (–3.21)
Hostile 0.011 0.012 –0.010 0.011
(0.76) (1.08) (–1.31) (1.28)
Tender 0.005 0.005 0.004 0.005
(1.17) (1.33) (1.08) (0.87)
Horizontal 0.010 0.009 0.011 0.011
(1.08) (1.16) (1.27) (0.85)
M&A activity –0.047 0.049* 0.051 0.041
(–1.33) (1.82) (1.42) (1.26)
Number of analysts 0.001** – 0.001** –
(2.07) (2.11)
Leverage 0.012 0.011 0.009 0.012
(0.65) (0.87) (1.56) (1.04)
ROA 0.012 0.013 0.012 0.011
(0.77) (1.09) (1.19) (0.88)
MTB ratio – –0.002 – –0.002
(–1.22) (–1.17)
Cash ratio –0.001 –0.001 0.002 0.001
(–1.24) (–1.34) (0.97) (1.21)
Leverage 0.004 0.005 0.005 0.003
(1.16) (0.98) (1.18) (1.07)
ROA 0.001 –0.001 0.001 0.001
(0.87) (–1.14) (1.21) (0.84)
MTB ratio –0.001 –0.001 –0.001 –0.001
(–1.18) (–0.56) (–1.05) (–1.42)
Cash ratio 0.015 0.014 0.012 0.013
(0.65) (1.06) (0.95) (1.28)
Private target 0.004** 0.004*** 0.004*** 0.005**
52

(2.09) (3.05) (2.84) (2.17)

Run-up 0.011** –0.012 0.011* 0.012*
(2.01) (–1.17) (1.74) (1.81)
Adjusted R2 0.07 0.08 0.09 0.08
F-statistic 7.45 6.87 6.87 8.26
alternative dividend measures and a set of control variables relative to the deal, acquirer and
target characteristics. The dependent variable is “CAR (–1, +1)”, which represents the
cumulative abnormal return of the acquirer for a three-day event window, centered on the
announcement date. The CAR is estimated using Brown and Warner’s (1985) standard event
study methodology. The alternative dividend measures are measures of changes in dividend
and dividend amount. The measures of changes in dividend are dividend increase, dividend
decrease, dividend no-change, and dividend initiation which are dummy variables that equal 1
if the firm increases the dividend, decreases the dividend, does not change the dividend, or
initiate a dividend on the last declaration date before the acquisition announcement,
respectively. Dividend amount is the sum of dividend in the year before the acquisition
announcement scaled by total assets. “Relative size” is the ratio of target total assets to
acquirer total assets. “Toehold” is a dummy variable that equals 1 if the acquirer holds any
shares of the target before the announcement date and 0 otherwise. “Multiple bidders” is a
“Hostile” is a dummy variable that equals 1 for hostile deals and 0 otherwise. “Tender” is a
dummy variable that equals 1 for tender offers, and 0 otherwise. “Horizontal” is a dummy
variable that equals 1 for horizontal deals (which involve firms with the same two-digit SIC
codes) and 0 otherwise. “M&A activity” is a dummy variable that equals 1 for deals
announced between 1998 and 2001, and 0 otherwise. “Number of analysts” is the number of
summary data. “Leverage” is the liabilities scaled by common equity. “ROA” is the earnings
before interest, taxes, depreciation, and amortization (EBITDA) divided by total assets.
“MTB ratio” equals the number of shares outstanding times the stock price close scaled by
common equity. “Cash ratio” is the total cash divided by total assets. “Private target” is a
dummy variable that equals 1 if the target is privately held and 0 otherwise. “Run-up” is the
cumulative stock price return of the target over the year preceding the announcement. The t-
statistics are reported in parentheses. All significance tests rely on robust standard errors
(cluster−adjusted). The F-statistic and the adjusted R-square measure the goodness-of-fit.
TABLE 7. Testing for informational difference of dividends between cash acquisitions

and stock acquisitions

53


Stock acquisitions Cash acquisitions
(1) (2) (3) (4)
Constant –0.029* –0.031* 0.059* –0.042*
Dividend status 0.012** 0.010** –0.103 0.015
(2.01) (1.98) (–1.22) (0.73)
Relative size – –0.011** – 0.001*
(–2.10) (1.79)
Toehold 0.005 0.006 –0.011 0.008
(0.77) (1.13) (–0.88) (1.27)
Multiple bidders –0.003*** –0.004*** –0.001* –0.001**
(–3.21) (–3.62) (–1.77) (–2.11)
Hostile 0.011 0.012 0.010 0.011
(1.44) (1.31) (1.01) (0.65)
Tender 0.005 0.005 0.006 0.005
(1.23) (1.29) (1.15) (0.87)
Horizontal 0.009 0.010 0.010* 0.009*
(1.05) (1.13) (1.81) (1.78)
M&A activity 0.049 0.063 0.021 0.035
(0.64) (0.55) (1.05) (0.75)
Number of analysts 0.001* – 0.001 –
(1.74) (0.62)
Leverage 0.011 0.012 0.013 0.011
(1.09) (1.22) (1.23) (0.68)
ROA –0.012 –0.015 0.010 0.013
(–1.34) (–1.63) (1.05) (1.18)
MTB ratio – –0.003* – 0.001*
(–1.78) (1.73)
Cash ratio 0.001 0.001 0.002 0.001
(0.74) (0.91) (1.36) (0.64)
Leverage 0.002 0.003 0.003 0.005
(1.21) (0.87) (1.17) (1.29)
ROA 0.001 0.001 0.001 0.001
(1.21) (1.45) (1.26) (0.74)
MTB ratio –0.001 –0.001 –0.001 –0.002
(–0.84) (–1.04) (–0.52) (–0.43)
Cash ratio 0.031 0.019 0.021 0.018
(1.19) (1.41) (1.09) (1.01)
Private target 0.004*** 0.005*** 0.002 0.005**
(2.93) (3.21) (1.10) (2.13)
Run-up 0.011* 0.010** 0.012** 0.009**
(1.77) (1.98) (1.98) (2.08)
2
Adjusted R 0.06 0.08 0.08 0.07
F-statistic 6.84 7.31 6.71 7.82
54

methodology. Models 1 – 2 are based on stock acquisitions, which represent transactions that
are solely paid in stock (N=711). Models 3 – 4 are based on cash acquisitions, which
represent transactions that are solely paid in cash (N=453). “Dividend status” is a dummy
variable that equals 1 if at least one regular dividend distribution is present over the year
preceding the transaction and 0 otherwise. “Relative size” is the ratio of target total assets to
acquirer total assets. “Toehold” is a dummy variable that equals 1 if the acquirer holds any
shares of the target before the announcement date and 0 otherwise. “Multiple bidders” is a
“Hostile” is a dummy variable that equals 1 for hostile deals and 0 otherwise. “Tender” is a
dummy variable that equals 1 for tender offers, and 0 otherwise. “Horizontal” is a dummy
variable that equals 1 for horizontal deals (which involve firms with the same two-digit SIC
codes) and 0 otherwise. “M&A activity” is a dummy variable that equals 1 for deals
announced between 1998 and 2001, and 0 otherwise. “Number of analysts” is the number of
summary data. “Leverage” is the liabilities scaled by common equity. “ROA” is the earnings
before interest, taxes, depreciation, and amortization (EBITDA) divided by total assets.
“MTB ratio” equals the number of shares outstanding times the stock price close scaled by
common equity. “Cash ratio” is the total cash divided by total assets. “Private target” is a
dummy variable that equals 1 if the target is privately held and 0 otherwise. “Run-up” is the
cumulative stock price return of the target over the year preceding the announcement. The t-
statistics are reported in parentheses. All significance tests rely on robust standard errors
(cluster−adjusted). The F-statistic and the adjusted R-square measure the goodness-of-fit.

55

TABLE 8. Two-step Heckman selection model

Dependent Variable Dividend status CAR (-1, +1)
Independent Variables
Constant –0.378*** –0.051***
Heckman’s Lambda – 0.014**
(1.98)
Deal characteristics –
Relative size – –0.001***
(–2.75)
Toehold – 0.005
(0.98)
Multiple bidders – –0.022***
(–3.18)
Hostile – –0.038
(–0.76)
Tender – 0.004
(1.23)
Horizontal – 0.003*
(1.79)
Number of analysts 0.001**
–
(1.98)
Industry percentage of dividend 0.865***
–
payers (2.87)
(1.32) (0.79)
ROA 0.012** 0.087
(2.13) (1.28)
MTB ratio –0.049*** –0.055**
(–2.75) (–2.12)
(1.21) (1.18)
Leverage – 0.069
(0.41)
ROA – 0.074
(1.34)
MTB ratio – –0.056
(–1.25)
Cash ratio – 0.023
(0.81)
Private target – 0.016***
(3.56)
Run-up – 0.029***
(2.76)
Number of observations 711 711
Adjusted R2 0.07
56

F-statistic 4.56
Note: This table shows the parameter estimates of the two-step Heckman’s (1979) selection
model. The first equation is a probit model with the acquirer’s dividend status as a dependent
variable. “Dividend status” is a dummy variable that equals 1 for dividend-paying acquirers
and 0 otherwise. The instrument is the industry percentage of dividend payers. The second
equation is an OLS regression of the three-day acquirer abnormal return on the control
variables and Lambda. “Heckman’s Lambda” is the inverse Mill’s ratio (Lambda), which is
the non-selection hazard. “CAR (–1, +1)” represents the cumulative abnormal return of the
acquirer for a three-day event window, centered on the announcement date. Acquirer’s CAR
is estimated using Brown and Warner’s (1985) standard event study methodology. “Relative
size” is the ratio of target total assets to acquirer total assets. “Toehold” is a dummy variable
that equals 1 if the acquirer holds any shares of the target before the announcement date and 0
otherwise. “Multiple bidders” is a dummy variable that equals 1 for deals involving more than
one bidder, and 0 otherwise. “Hostile” is a dummy variable that equals 1 for hostile deals and
0 otherwise. “Tender” is a dummy variable that equals 1 for tender offers, and 0 otherwise.
“Horizontal” is a dummy variable that equals 1 for horizontal deals (which involve firms with
the same two-digit SIC codes) and 0 otherwise. “M&A activity” is a dummy variable that
equals 1 for deals announced between 1998 and 2001, and 0 otherwise. “Number of analysts”
is the number of analysts following the acquirer in the month before the acquisition, as
reported by IBES summary data. “Industry percentage of dividend payers” is the percentage
of dividend paying acquirers in the same two-digit Standard Industrial Classification industry
in a year. “Leverage” is the liabilities scaled by common equity. “ROA” is the earnings before
interest, taxes, depreciation, and amortization (EBITDA) divided by total assets. “MTB ratio”
equals the number of shares outstanding times the stock price close scaled by common equity.
“Cash ratio” is the total cash divided by total assets. “Private target” is a dummy variable that
equals 1 if the target is privately held and 0 otherwise. “Run-up” is the cumulative stock price
return of the target over the year preceding the announcement. The t-statistics are reported in
parentheses. All significance tests rely on robust standard errors (cluster−adjusted). The F-
statistic and the adjusted R-square measure the goodness-of-fit.

57

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DIVIDEND POLICY AND STOCK ACQUISITION ANNOUNCEMENT RETURNS:

A TEST OF ASYMMETRIC INFORMATION THEORY

European Business School of Paris, INSEEC U.

Research Center. He thanks Sebastien Dereeper, Khamis Al-Yahyai (25th Australasian

Association Conference, 2013) for their helpful comments and suggestions.

This article is protected by copyright. All rights reserved.

initiated by dividend-paying firms compared with those initiated by non–dividend-paying

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JEL classification: G34, G35

asymmetric information to explain negative returns to stock-based mergers and acquisitions,

might be additionally insightful. Dividend-paying firms create less information asymmetry

stock-based mergers and acquisitions.

payer SEO announcements than to non–dividend-payer SEO announcements. By examining

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Dividend-paying acquirers should have less negative announcement-induced returns than

non–dividend-paying acquirers, because dividend payers create less information asymmetry

negatively to the announcement of a stock offer.

dispersion represent acquirer-side information asymmetry. The computation of the acquirer’s

by non–dividend-paying acquirers. Second, a cross-sectional analysis of acquirer abnormal

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Fourth, an assessment of whether dividends solve information asymmetry for cash

stake, because the payment is solely in cash.

II. Theoretical background

This section reviews relevant contributions from merger-and-acquisition literature, as well as

insights from literature pertaining to the implications of dividend policy on asymmetric

Stock payment, asymmetric information, and negative announcement returns

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payment is motivated by asymmetric information. Therefore, the investor requires other

Information content of acquirer announcement return

Using acquirer announcement returns as an indicator of the acquirer’s asymmetric

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two situations in which it is possible to disentangle the informational effects of announcement

information contained in acquirer announcement returns. They examine returns to acquirers

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in the announcement returns.1

Dividend policy and asymmetric information

that ensures changes in dividends correlate closely with changes in value.

asymmetry in the merger-and-acquisition setting, by exploring whether the acquirer’s

dividend payment reduces negative market reactions to announcements of stock-based

What uncertainty gets reduced through dividend payments in acquisitions?

acquirer in the case of stock-based acquisitions, benefit, as do acquirer shareholders if the

post-acquisition cash flow is positive, as signaled ex ante by dividends. Alternative

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react less negatively to announcements, especially of stock-based acquisitions; concerns about

stock (Travlos, 1987; Chemmanur, Paeglis and Simonyan, 2009).

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particularly after the mid-1980s.

Despite this extensive literature on the effect of dividends on valuation uncertainty, no

III. Data and methods

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acquirer) of $1 million or more, to ensure a focus on significant deals. 2 This sampling

year-end, resulting in 711 deal observations.

dominance of stock acquisitions during periods of high misevaluation. 4 Harford (2005)

and-acquisition activity (i.e., number of stock acquisitions) should be controlled for in

and-acquisition activity in the 1990s strongly clusters by industry, so it also is necessary to

control for industry effects in multivariate tests.

[INSERT FIGURE I HERE]

1985–2002 and 2003–2013 (see Section V).