An examination of the free cash flow and information/signaling hypotheses using unexpected dividend changes inferred from option and stock prices: The case of regular dividend increases

This paper measures unexpected dividend changes in testing the free cash flow and information/signaling hypotheses using the BarYosef/Sarig method. The empirical findings reveal the following: (i) The association between announcement period abnormal returns and the cash level is significantly positive for low q firms; (ii) The positive association between announcement period, abnormal returns, and the cash level is stronger in low q than in high q firms for most regressions; (iii) Low q firms reduce their capital and research and development (R&D) expenditures during the four fiscal years following dividend increase announcements. Our results are consistent with the free cash flow hypothesis. © 2011 World Scientific Publishing Co. and Center for Pacific Basin Business, Economics and Finance Research.