Special Dividend Distributions, Firm Characteristics, and ......Special Dividend Distributions, Firm Characteristics, and Economic Conditions January 2014 Abstract We show that the

Special Dividend Distributions, Firm Characteristics, and Economic Conditions

January 2014

Abstract

We show that the firm’s decision to pay special dividends is related to its investment opportunities, based

on growth options that are available within the prevailing economic environment. Specifically, firms are

more likely to pay special dividends when their investment opportunities are restricted by a weak

economy or by their own recent investment decisions. We also show that the share price response of

special dividend payments is more favorable when the firm’s investment opportunities are restricted by a

weak economy. Furthermore, the share price response to a special dividend distribution during a period in

which a higher dividend tax is anticipated is more favorable when economic conditions are weak.

Keywords: Special Dividends Distributions, Economic Environment, Share Price Response

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I. INTRODUCTION

Over the last few years, special dividends have received much attention by financial managers,

shareholders, and the financial media. The attention is partially due to government deliberations in 2010

and 2012 to increase the tax rate on dividends.1,2

Many firms announced in the fourth quarter of 2010 and

2012 that they would pay special dividends to distribute cash ahead of the possible tax increase.3

However, after controlling for firm characteristics and the economic environment, we find that the recent

distributions of special dividends were not driven by the proposed change in tax laws: the number of

firms distributing special dividends and the total dollar amount paid4 are not statistically different in these

two years compared to the years surrounding the potential tax rate increase. We identify and analyze the

underlying factors associated with the decision to pay a special dividend and the share price response to

special dividend announcements.

Our first research question identifies factors that are associated with the firm’s decision to pay

special dividends. Prior literature has isolated several firm characteristics associated with the propensity

to distribute cash via a special dividend. In addition, Hu (2012) shows that macroeconomic conditions and

investor sentiment are associated with aggregate special dividend payments. We fill a gap in the literature

by showing that the interaction between firm characteristics and investment opportunities available in the

economy help to explain why some firms are more likely to distribute special dividends. We find that

firms that have more limited growth options due to weak economic conditions or due to their own recent

financial decisions may face a lower opportunity cost when using cash to pay special dividends instead of

expanding their business.

Our second research question investigates whether the sensitivity of the share price response to a

special dividend announcement depends on individual firm characteristics and their interaction with the

economic environment. Paying a special dividend may elicit a more favorable share price response when

1 http://money.cnn.com/2010/12/08/markets/special_dividends_bush_tax_rates/index.htm 2 http://www.reuters.com/article/2012/02/13/us-usa-budget-dividend-idUSTRE81C1A420120213 3 https://exchanges.nyx.com/judy-mclevey/dividends-cliff 4 The parametric t-test for the difference in dividend amount with unequal variance is 1.17 (p-value of 0.1204) while a non-parametric (Wilcoxon

rank-sum) is -3.74 (p-value of 0.0002), where the rank of special dividends in potential tax increase years is significantly lower than the rank of special dividends in other years.

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the firm’s growth options are limited because the opportunity cost of funds is relatively low. In other

words, firms may be rewarded for returning funds to shareholders rather than using cash for weak

investment prospects. Just as firm managers may recognize the greater benefits from paying special

dividends when their investment opportunities are limited, their investors may recognize these benefits as

well. Our empirical tests show that the share price response of firms that paid special dividends was

greater during weak economic conditions when firms had fewer investment opportunities.

We contribute to the literature on special dividends in two ways. First, by incorporating the

contemporaneous economic environment into our cross-sectional analysis, we show that the impact on the

propensity to pay a special dividend and the share price response to the announcement are associated with

the state of the economy. Second, we extend Hu’s (2012) macroeconomic time series analysis to include

the recent financial crisis. This is important since many have labeled this “Great Recession” as different

from any other crisis because of the massive liquidity shock faced by all market participants.5

II. MOTIVES TO PAY SPECIAL DIVIDENDS

Commonly cited motives for paying special dividends are (1) signaling, (2) transferring wealth

from bondholders to stockholders, (3) restricting free cash flow, and (4) capitalizing on impending tax

law changes, as discussed in turn.

Signaling

A number of studies investigate whether special dividends signal information about current or future

performance. Intuitively, the sporadic nature of special dividend payments may suggest that they are not

used to communicate any ongoing information about the firm. In an early study, Brickley (1983)

distinguishes between special and regular dividends by suggesting that special dividends notify

shareholders that the cash distribution will not be provided on a regular basis. Gambola and Liu (2009)

call the announcement of special dividends “an implicit disclaimer that the firm might not continue this

form of dividend in the future” (309). Crutchley et al. (2003) show that the signals from special dividend

5 For example, see Labonte (2010).

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payments are not reliable, since stock performance and operating performance associated with the

announcement of a special dividend soon disappear.

Other studies, however, offer support for the signaling hypothesis; for example, see Howe, He, and

Kao (1992), Shih (1992), Mitra (1997), Chhachhi and Davidson (1997), Jayaraman and Shastri (1998),

Gombola and Liu (1999), and Baker, Mukherjee, and Powell (2005). In particular, Howe, He, and Kao

(1992) argue that the role of special dividends as a signaling device is distinguished from stock

repurchases because they are more useful if the firm wants to distribute excess cash to shareholders at a

point in time when share prices are relatively high. Baker, Mukherjee, and Powell (2005) conduct a

survey providing evidence that special dividends signal current (but not long-term) performance.

Transferring Wealth from Bondholders to Stockholders

Special dividends may also be motivated by managerial desires to transfer wealth from

bondholders to stockholders. Dhillon and Johnson (1994) find supporting evidence by showing that

positive stock price and negative bond price changes accompany announcements of an increase in

dividends. Most other studies, however, do not find evidence to support the wealth transfer motive of

special dividends [for example, see Jayaraman and Shastri (1988), Gombola and Liu (1999), Baker et al.

(2005)]

Restricting Free Cash Flow

Jensen (1986) explains how the use of debt in the capital structure prevents managers from

overinvesting free cash flow in projects that can be detrimental to shareholders. In a similar manner,

special dividends are a way for managers to distribute free cash flow to shareholders which can reduce the

overinvestment problem.6 Lie (2000) finds that special dividends restrict managerial overspending. Hu

(2012) suggests that firms paying special dividends in periods of low economic activity can show their

discipline in using cash properly when investment opportunities are limited.

6 As an example, see Wruck (1994) who shows that Sealed Air Corporation’s leveraged special dividend was an effective mechanism to improve internal corporate control.

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On the other hand, Denis (1990) argues that special dividends can be used as a tool for managers

to achieve entrenchment. Baker, Mukherjee, and Powell (2005) conclude from their survey of managers

that reducing agency costs is not an important reason why they pay special dividends. Gombola and Liu

(1999) find no evidence to support the agency cost explanation of special dividends.

Capitalizing on Impending Changes in Tax Laws

Just as firms should respond to reductions in dividend tax rates by increasing dividend payouts

[see Chetty and Saez (2005) and Blouin, Raedy, and Shackelford (2011), Brandon and Ikenberry (2005)],

they may respond to an expected increase in dividend tax rates by expediting dividend payments before

the new tax law is implemented. Lie and Lie (1999) argue that personal taxation affects the managerial

choice between share repurchases and dividend distributions. Hanlon and Hoopes (2012) show evidence

that firms responded to the possible change in tax laws in 2010 by shifting the special dividends to the last

quarter of the low tax year.

III. HYPOTHESES

Prior research has identified a number of firm-specific characteristics that explain the decision to

pay special dividends and how stock prices react to special dividend distribution announcements. We

build on the existing research by suggesting how the relationship between a firm’s financial

characteristics and the decision to distribute special dividends, and the share price response to that

decision, can be altered by weak economic conditions that reduce the level of growth options.

Growth Options and Firm Propensity to Pay Special Dividends

Liquidity (funds availability): The effect of a weak economy on the likelihood of a firm paying a special

dividend is ambiguous. While the lower opportunity cost of distributing funds in an economy marked by a

dearth of investment options should increase the probability of a special dividend distribution, this may be

offset by concerns about the ability to raise funds externally during such times. We predict that there is a

positive relationship between the firm’s level of cash and its willingness to provide special dividends.

Firms with a larger proportion of cash are more capable of providing a special dividend without danger to

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their liquidity. Using sample data between 1980 and 1997, Lie (2005) finds evidence that the payment of

special dividends is associated with large cash balances. Similarly, we expect a negative relationship

between the firm’s debt ratio and its willingness to pay special dividends. Firms with relatively low debt

should be more capable of providing a special dividend without danger to their liquidity. Lie (2005)

shows that firms with lower debt ratios are more likely to pay special dividends.

The potential benefits of using the cash to distribute special dividends may be greater when

alternative uses of cash are limited and when much cash has been accumulated. Therefore, we expect that

the anticipated relationships for cash and debt may be especially strong in weak economic periods when

paying special dividends can signal good management decision making with respect to cash balances.

Capital Expenditures: The impact of recent firm investment decisions on the propensity to pay a special

dividend is unclear. Firms that recently had more capital expenditures might need more funding to

support their internal growth, and therefore may be less likely to distribute special dividends. This

relationship could be especially pronounced in weak economic periods when raising funds in the financial

markets is difficult. On the contrary, firms that have recently made substantial investments may not take

on further projects, making them more likely to distribute cash in the form of a special dividend. This

effect may be enhanced in a weak economy when investment opportunities dry up.

Profitability: Firms that experience a more favorable recent change in EPS may be more able to afford a

cash dividend. Lintner (1956) and Edgerton (2010) suggest that the increased dividend payouts may result

from increased earnings. In addition, firms that experience strong performance may be more likely to

distribute dividends, as they have more flexibility from the board to disburse funds as they see fit. To the

extent that managers attempt to use funds wisely, the propensity to distribute special dividends in

response to a lower EPS level may be altered when the economy is weaker and growth options are

limited. The anticipated positive relationship may be especially strong in weak economic periods when

paying special dividends can signal (1) strong future performance and/or (2) good management decision

making.

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Alternatively, we also use return on assets (ROA) as a measure of profitability that may capture a

different dimension compared to short term EPS fluctuations. We predict a positive relationship between

the firms’ ROA and its willingness to pay a special dividend.7 We expect that this effect is moderated in a

weak economy, however, as profitable use of assets gives a firm confidence to spend funds rather than

distribute cash. Furthermore, there may be less pressure from shareholders or the board so managers have

more freedom to spend funds rather than pay special dividends.

Market-to-Book Ratio: Firms that have a lower market-to-book ratio at a given point in time may be

perceived by investors to have fewer growth opportunities and, therefore, may be more likely to offer a

special dividend. Lie (2005) finds that firms with lower market-to-book ratios are more likely to pay a

special dividend. However, this relationship may become insignificant when economy wide growth

opportunities experience a shock. For example, a firm with a low market-book ratio may reassess its cash

distribution policy in an economic crisis. This is especially true for the weak economic periods

surrounding the 2008 financial crisis, which was characterized by limited access to liquidity and a tight

credit market.

We apply the following hypothesis to assess how the propensity of a firm to pay special dividends

is related to the interaction between the firm’s financial characteristics cited above and its growth

opportunities:

Hypothesis 1: On average, the stronger a firm’s financial position and the fewer investment options it

has, the more likely it is to distribute a special dividend. The relationship is intensified in periods of high

economic uncertainty when growth opportunities are low and the opportunity cost of distributing special

dividends is low.

Control variables

In addition to the variables mentioned above, we include the following variables that could also

affect the distribution of special dividends:

7 The opposite can also be argued about ROA. Baker, Mukherjee, and Powell (2005) find that firms that experienced strong performance in the

past have confidence that they can utilize the cash in a manner that is more productive than distributing it to shareholders and therefore, one might expect those firms to pay less dividends.

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Insider Ownership: Hanlon and Hoopes (2012) find that increases in special dividends and prepaid

regular dividends are concentrated in firms with high insider ownership. We hypothesize that when the

economy is weak, firms with higher inside ownership become more likely to issue special dividends

because it provides a stronger signal of managerial alignment of interest with shareholders. This effect is

intensified during weak economic periods when agency costs are likely to be high.8

Common Payers of Dividends: Firms that provide a consistent stream of dividends may be more willing

to provide a special distribution since their clientele of shareholders is more likely to appreciate receiving

a cash distribution. Miller and Modigliani (1961) imply that dividend payers may attract certain types of

investors. John and Williams (1985) note that firms that currently pay dividends tend to have a

shareholder base that expects cash disbursements. Graham and Kumar (2006) document that dividend

clienteles exist.9 Baker and Wurgler (2004) demonstrate that managers initiate dividends when investors

place a premium valuation on firms that pay dividends. In a similar manner, managers should be more

willing to initiate special dividends when investors place a valuation premium on firms that pay them,

such as during a weak economy when alternative uses of funds are limited. Therefore, we predict that

firms that pay regular dividends are more likely to pay special dividends and this effect is intensified in a

weak economic environment.

Tax Increase Year: Lie and Lie (1999) and Hanlon and Hoopes (2012) show firms are more likely to

issue special dividends when personal tax rates are low. During both 2010 and 2012, there was much

speculation that the tax rate on dividends would be increased in the next year, which may have triggered

the managerial decision to distribute special dividends. Furthermore, the likelihood may be greater when

economic conditions are weak, because of the limited growth options available.

8 A more cynical explanation is that insiders may be more likely to use special dividends distributions when their total compensation from all

sources is relatively low. This could be the case when the economy is weak. 9 In unreported results, we also considered the dividend yield as a substitute to the common dividend payer dummy variable. Firms that pay a

high dividend yield might be especially enticed to distribute special dividends since they know their clientele of shareholders appreciates cash

distributions. The results are quantitatively similar.

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Explaining Variation in Share Price Responses in Different Economic Periods

Jayaraman and Shastri (1988) find that firms experience a favorable share price response when

they announce a special dividend. Hu (2012) assesses special dividend payments over the 1926-2008 and

shows that the valuation effects to special dividend payments were more favorable during weak economic

periods.

To the extent that the firm’s managers are serving their shareholders, all of the aforementioned

characteristics that may motivate managers to pay special dividends may also generate higher share price

response. Furthermore, firms with particular characteristics that restrict their respective growth options to

a greater degree may incur even lower opportunity costs of distributing special dividends when the

economy is weak. This leads to our second hypothesis:

Hypothesis 2: On average, the lower the growth opportunities available to a firm, the greater the share

price reaction to the announcement of special dividend distribution. The relationship is intensified in

periods of high economic uncertainty when outside growth opportunities are low and the opportunity cost

of distributing special dividends is low.

In addition to the previously mentioned variables, we expect that the size of the special dividend

will have an impact on the announcement return. To the extent that the enhanced stock valuation in

response to a special dividend is attributed to strong performance or prudent management, the share price

response should be positively associated with the size of the special dividend that is distributed by the

firm. This effect should be magnified in a weak economy if the signal of prudent management is valued

by shareholders to a greater degree.

IV. METHOD AND SAMPLE

Proxies for Economic Conditions

To determine whether a firm’s likelihood of paying special dividends and the share price response

to announcements of special dividends are influenced by the economic environment, we use four different

proxies to measure economic conditions. These measures are based on the performance of the overall

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stock market, market volatility, and credit availability. First, we appeal to official NBER data on

economic performance, where 1 represents recessionary periods as defined by NBER and 0 captures non-

recessionary quarters. Second, we include the monthly performance of the S&P 500 Index. The top 25%

worst performing months are assigned a 1 (bad economy) and the rest a 0 (good economy). Third, we use

the monthly percentage change in the level of S&P 500 implied volatility of options index (VIX). The top

25% of most volatile months are assigned a 1 (high volatility=bad economy) and the rest of the months

are assigned 0 (low volatility=good economy). Fourth, we use Harford’s (2005) liquidity measure to

capture another dimension that assesses economic conditions. Harford shows that high capital liquidity is

associated with economic expansions.10

This variable is defined as the spread between the average interest

rate on commercial and industrial loans and the Federal Funds rate. The larger the spread, the less liquid

are the financial markets.

Modeling the Likelihood of Paying Special Dividends

To determine the characteristics that are associated with offerings of a special dividend, we apply

a logistic regression model to the sample of firms that paid special dividends for the period 2004-2012.

We match the firms that paid special dividends with similar firms from COMPUSTAT that did not pay a

special dividend. The match is done by year, industry (same 4-digit SIC code and when not possible, by

the same 3and then 2-digit SIC code), size (as measured by the log of total assets), and profitability (as

measured by net income). We use matching firms with size and profitability within 20% of the dividend

paying firm. All models include year fixed effects.11

The model is:

SPECIALDIV= α+ β1WeakEconomy+ β2CASH+ β3DEBT+ β4CAPEX+ β5ΔEPS+ β6ROA+ β7INSIDE+

β8MKTBOOK+ β9COMMONPAY+ β10TAXYEAR+ β11CASH*Weak+ β12DEBT*Weak+

β13CAPEX*Weak+ β14ΔEPS*Weak+ β15ROA*Weak+ β16INSIDE*Weak+ β17MKTBOOK*Weak +

β18COMMONPAY*Weak+ β19TAXYEAR*Weak+ ε (1)

10 In our sample, the liquidity factor is not a substitute for the other factors. In fact, volatility and liquidity are inversely associated. Nevertheless,

the liquidity factor is an important dimension of the economy as it provides a gauge for the ease with each external capital can be accessed. 11 To make sure the fixed effects do not capture weak economic years, we repeat the analysis without including fixed effects and obtain similar results.

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where SPECIALDIV equals 1 if the firm announced that it would pay special dividends, and 0 otherwise.

The independent variables are compiled from COMPUSTAT Fundamentals Annual during the year prior

to the announcement of special dividends as follows12

:

WEAK_ECONOMY = identifies the weak and strong economic periods along four different

dimensions, as described above.

CASH = cash and short term investments available scaled by total assets [CHE/AT].

DEBT = long term debt/assets ratio [DLTT/AT].

CAPEX = capital expenditures in proportion to total assets [CAPX/AT].

ΔEPS = percentage change in basic EPS excluding extraordinary items from the previous year

[change in EPSPX].

ROA = measured as net income divided by total assets [NI/TA].

INSIDE = proportion of insider ownership collected from Compustat ExecuComp and where not

available, extracted from various financial sources such as Bloomberg, company annul reports,

and quarterly financial statement filings [aggregate SHROWN_TO_PCT, where available].

MKTBOOK = market/book ratio [(MKVALT/CEQ)/BKVLPS)].

COMMONPAY = dummy variable that is set equal to 1 if the firm also provided quarterly

dividends in the same year, and 0 if it did not.

TAXYEAR = dummy variable that is equal to 1 if the firm issued the special dividends in either

2010 or 2012, and 0 otherwise.

We apply the model to the pooled sample 2004-2012 with interaction terms between each of the

independent variables and WEAK_ECONOMY. The coefficient of the interaction terms measures the

additional impact of each independent variable on the propensity of firms to pay special dividends in a

weak economic period compared to a strong economic period.

12 For example, if the special dividend was announced on 03/01/2007, the COMPUSTAT variables used are from the previous years on 12/31/2006. As a robustness check, we also used the previous quarter results from Fundamentals Quarterly.

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We choose this sample period for two main reasons. At a firm level, Gao, Zu and Zimmerman

(2009) show one of the unintended consequences of SOX was the rate at which firms paid dividends.

Specifically, they find that firms paid more dividends in the post-SOX period after controlling for a host

of factors. To eliminate confounding effects, we concentrate our sample in the time period since SOX was

implemented.

In addition, using a macro approach focused on aggregate distributions of special dividends, Hu

(2012) finds that firms are more likely to pay dividends in recessions. However, her sample stops before

the 2008 financial crisis, a recessionary period that many economics argue is unique. Labonte (2010)

points to the fact that the 2008 was different from any other recessionary period because of the disruption

in financial markets. Although it is commonly compared to the Great Depression, it is different along

many dimensions: the change in output was much less severe, unemployment was not as high, the change

in prices was not as drastic, and the degree of government’s involvement was much higher. Thus, we

concentrate on analyzing how the distribution of special dividends changes in good and bad economic

periods, by looking specifically at the recent financial crisis.

Multivariate Model of Share Price Responses among Firms That Pay Special Dividends

Next, we investigate how the share price response to special dividend announcements varies among

firms. The dependent variable is the cumulative abnormal return (CAR), which is measured as the 3-day

window (-1, +1) around the announcement of the special dividend. We also conduct an analysis based on

a 5-day window, CAR (-2, +2), and a 1-day window (day 0), as robustness checks. The multivariate

model is specified as:

CAR (-1,+1)= α+ β1WeakEconomy+ β2CASH+ β3DEBT+ β4CAPEX+ β5ΔEPS+ β6ROA+ β7INSIDE+

β8MKTBOOK+ β9COMMONPAY+ β10TAXYEAR+ β11SIZESPECIAL+ β12BADPERF+

β13CASH*Weak+ β14DEBT*Weak+ β15CAPEX*Weak+ β16ΔEPS*Weak+ β17ROA*Weak+

β18INSIDE*Weak+ β19 MKTBOOK*Weak+ β20 COMMONPAY*Weak+ β21TAXYEAR*Weak+

β22SIZESPECIAL*Weak+ β23BADPERF*Weak+ ε (2)

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The first ten independent variables were previously defined and are the same as in the logistic

model. The additional variables in the multivariate model of share price responses among firms that pay

special dividends are:

SIZESPECIAL = dollar amount of the special dividend per share as a percentage of net income.

BADPERF = a dummy variable set equal to 1 for firms that experienced a decline in EPS over

the previous year and 0 if they experienced a zero or positive change in EPS over the previous year.

We include this binary variable of EPS performance because the ΔEPS variable had a great deal of

volatility throughout our sample, especially during the 2007-2010 period, which may influence our

results.

Sample

We focus on firms that announced special dividends from 2004-2012. We identify all firms with

distribution codes of 1262 and 1272 (special dividends) and share codes of 10 and 11 only using CRSP

monthly security files.13

We do not include firms that expedited their planned dividend payment in this

sample, if we can clearly identify these situations from the financial press. A summary of our sample is

presented in Table 1, Panel A. We present both parametric and non-parametric tests for differences,

accounting for the possibility of a non-normal sample distribution.

We are able to identify 847 firms (for which we can collect all other variables) that paid special

dividends over our sample period. In Panel B, we compare the characteristics of firms that pay special

dividends with those of the control group. In addition, for comparison purposes, we break down the

sample of firms that pay special dividends based on economic performance, using the S&P 500 index

defined earlier as the indicator variable.

In the univariate analysis (Panel B of Table 1), we show that on average, firms which pay special

dividends have significantly higher amounts of cash over firms that did not (22.43% versus 16.73%),

higher recent earnings and performance, as seen by the change in EPS (+18.80% versus +4.96%) and

13 We find that some of the special dividends are stored in CRSP as regular dividends. Given We manually check the news for extra announcements of special dividends during the fourth quarter of 2010 and 2012, adding those firms to our sample.

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ROA (9.02% versus 3.98%), and higher percentage of insider ownership (19.81% versus 11.78%). In

addition, the firms that usually pay regular dividends are also more likely to issue special dividends

compared to firms that normally do not (95.94% versus 44.75%).14

When we compare the characteristics of firms that pay special dividends in weak versus strong

economic periods (Panel B of Table 1), we find that in weak periods, the cash effect persists; in other

words, firms with high cash reserves are more likely to pay special dividends in weak versus strong

economic periods (23.11% versus 18.56%). In addition, firms with high levels of insider ownership and

firms that usually pay regular dividends are even more likely to pay special dividends when the economy

is weak (22.91% versus 18.23% and 70.77% versus 67.39%, respectively). Finally, less profitable firms

as measured by the change in EPS are less likely to pay special dividends in weak economic periods

(-9.64%versus 15.66%).

V. RESULTS

Likelihood of Paying Special Dividends

The results from examining the factors that contributed to the payment of special dividends are

disclosed in Table 2. Consistent with Hu (2012) and Lie (2005), we find that firms with larger cash

balances are more likely to distribute special dividends. We attribute this finding to the fact that these

firms could afford the payment. We also find that firms that recently experienced higher growth in EPS or

return on assets are more likely to distribute special dividends, which supports our first hypothesis. Our

results are in agreement with Bulan et al. (2007) and Baker (2005) who show that firms that pay special

dividends tend to be large, highly profitable, with high cash balances and that recently experienced strong

earnings and cash flows.

The coefficient of INSIDE is positive and significant, indicating a greater propensity of firms

with a higher proportion of inside ownership to distribute special dividends. These results are consistent

with Hanlon and Hoopes (2012), who found that firms with higher insider ownership are more likely to

14 Firms that normally pay regular dividends are also more likely to pay a higher percentage of their net income as a special dividend. The dividend yield is 8.27% on average, compared to 2.31% for firms that do not normally pay a regular dividend.

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pay a special dividend at the end of 2010. Unlike the tax driven argument they use, we show that the

relationship holds over time, even when including periods in which tax rate adjustments on dividend

income are not anticipated. We attribute our results to a stronger alignment between management and

shareholder interests, which entices management to distribute special dividends when its investment

opportunities are questionable.

Our results further suggest that common dividend payers are more willing to provide a special

dividend, as they recognize that their clientele benefits from dividend payments.15

Interestingly, the

coefficient of TAXYEAR is not significant in any of the models. These results are consistent with our

univariate analysis. They suggest that the propensity to pay special dividends is not necessarily associated

with an expected adjustment in the tax rates on dividends.

Our main focus is on whether and how the firm’s propensity to distribute special dividends in

response to financial characteristics is altered by economic conditions. For this purpose, we turn our

attention to the coefficients that capture the interactions between firm characteristics and economic

conditions. The coefficient on the CASH*Weak variable in the first three models of Table 2 is positive

and significant, which suggests that firms with large cash balances are even more likely to issue special

dividends when the economy is weak. This is consistent with our hypothesis that the propensity to pay

dividends from cash balances is even higher when the firm’s growth options are more limited. One

(apparent) exception is in Model IV, in which the likelihood of firms with large cash balances paying

special dividends is lower under weak conditions. However, the proxy for a weak economy here serves as

a measure of market liquidity. Thus, the interpretation may be that when market liquidity is especially low

(obtaining new funds is difficult), firms may take a more conservative stance by retaining more cash,

which can discourage them from paying special dividends.

We find a negative relationship between the interaction of ROA and economic conditions. These

results suggest that the positive effect of a firm’s recent performance on the probability of paying a

15 To the extent that special dividends may be more appealing to shareholders who have invested in firms that pay dividends, we apply an

additional multivariate analysis that is focused solely on dividend-paying firms. For this analysis, we are attempting to identify the financial characteristics that can explain the propensity to pay special dividends the subset of those firms that paid regular dividends.

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special dividend is less pronounced in weak economic periods when growth options are more limited.

When a firm’s management is generating solid returns on its assets, it may receive less pressure from

shareholders or the board to distribute cash, as it has earned more freedom to invest its funds.

The results related to the impact of insider ownership suggest that when the economy is weak,

firms with higher insider ownership are even more likely to issue special dividends. Thus, the alignment

of interests between managers and shareholders is stronger in those periods. We also find that the

coefficient of COMMONPAY*Weak is positive and significant in two of four models. This evidence

suggests that common dividend payers are even more willing to provide special dividends in weak

economic periods. We interpret this to be an additional signal about the common dividend payers’

commitment not to squander resources when growth opportunities are limited.

Share Price Response of Firms That Paid Special Dividends

The results from estimating the share price response experienced by firms that announced a

payment of special dividends are disclosed in Table 3. Panel A displays the CAR over the five-, three-

and one-day period around the announcement date for firms that paid special dividends compared to the

control group. The mean CAR upon the announcement of special dividends over the period 2004-2012

was 2.94% over the five-day window and 2.73% over the three-day window, both significant at the 1%

level. By comparison, the CARs for the control sample are 0.16% and 0.12% and are not different from

zero. The difference between the special dividends sample and the control sample are significant at the

1% level using both parametric and non-parametric tests.

When we examine the sample of special dividends based on the performance of the economy

(univariate analysis, Table 3, panels B, C, and D), we observe higher CARs in weak periods, which on the

surface are consistent with Hu’s (2012) findings that the markets react more positively to announcement

of special dividends in recessions compared to expansions. For example, using NBER definition of a

weak economy, we find the five day CAR to be 3.23% in weak economic periods and 2.90% in strong

periods. However, the differences in our univariate analysis are not statistically significant. We assess the

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impact of the economic conditions on the share price response to special dividend payments more closely

in the following section.

Results of Multivariate Analysis of Share Price Responses of Firms Paying Special Dividends

Results from applying our multivariate model to explain the variation in share price responses of

firms paying special dividend announcements are disclosed in Table 4. There is a strong association

between the performance of the economy and announcement CARs. Firms that pay special dividends in

weak economic periods experience higher positive returns than firms that pay special dividends when the

economy is strong. We attribute the difference to investors rewarding firm management for not wasting

the cash on limited growth opportunities.

In Model IV, the liquidity measure is used as the proxy for economic weakness. The insignificant

coefficient shows that firms are not bid up in value when they distribute cash in a tight credit market. This

suggests that the decreased financial flexibility the firm has when it announces the special dividend in the

tight credit market may offset the positive impact of a lower opportunity cost of distributing cash in weak

economic environments in general.

We find a positive relationship between CARs and CASH and an inverse relationship with

DEBT. As predicted, firms that have more cash and lower debt levels are rewarded to a greater degree

when they announced a special dividend payment. The higher share price response may be attributed to

the market’s assessment that firms with these characteristics can afford to make the payment easier

without increasing financial distress costs. These results are further supported by the coefficient of ΔEPS,

which is positive and significant in all four models, while the coefficient of ROA is positive and

significant in two models. The results once again suggest that firms more capable of affording the

payments are rewarded with higher valuations in response to the announced distribution of special

dividends.

We also find that the share price response to a special dividend distribution is more favorable for

firms with a relatively high market-book ratio. This result may seem surprising since firms with a high

18

market-to-book ratio are often thought to have a larger set of investment opportunities. However, firms

are perceived to have more growth opportunities may demonstrate more discipline when they are willing

to distribute special dividends to their shareholders rather than pursue investments that they have judged

to be questionable.

Similar to the results in the logistic regression, we show that the associating between insider

ownership and CAR is consistent, regardless of the projected tax changes. The price response to special

dividend announcements is more favorable for firms that have a higher proportion of insider ownership,

regardless of the year. These results support the argument that the decision to distribute special dividends

rather than pursue existing growth opportunities is viewed more favorably by the market when the firm’s

managers have a bigger equity stake. Not surprisingly, the size of the special dividend is also positively

associated with CAR; the bigger the special dividend, the more favorable the shareholder response to the

announcement.

As our main focus is on whether and how the share price response to the special dividend

distributions is altered in periods when the firm has more limited growth options (as measured by weak

economic conditions), we include interaction terms in the model between each of the financial

characteristics and the conditional existence of a weak economy. We find that the positive relationship

between the share price response to a firm’s special dividend distribution and its cash level is more

pronounced during weak economic conditions when its growth options are more limited. Firms are

especially rewarded for paying special dividends if they are disciplined in managing their high levels of

cash. In model IV, however, the coefficient is significantly negative. The positive impact of higher cash

balances on the share price reaction to a special dividend announcement is tempered when the economy is

experiencing liquidity issues. The negative coefficient on the debt interaction variable in model IV

provides additional evidence that managerial actions that reduce financial flexibility can have adverse

effects in tight credit markets.

In addition, we show that firms that distribute special dividends and had lower prior year ROAs

are rewarded more by the market when their investment opportunities are more limited. Finally, we find

19

that the coefficient of TAXYEAR*Weak is positive and significant in two models, which suggests that

the share price response is more favorable during a period of an expected increase in tax rates when the

economy is weak. This offers additional support for the argument that firms are rewarded more from

distributing special dividends when their growth options are more limited.

VI. CONCLUSION

During the last few years, the payment of special dividends has received increasing attention in

the financial press. Facing the possibility of a tax increase on dividends at the start of 2011 and 2013, the

financial media directed attention at the potential benefits of special dividend announcements in 2010 and

2012. However, we find that the number of firms paying special dividends and the total dollar amount

designated in those two years were not statistically greater than in other years during our 2004-2012

sample period. This motivates our research to identify the underlying factors associated with the decision

to pay a special dividend in recent years, and the share price response to the special dividend

announcement.

We find that characteristics previously established in the literature, such as cash holdings, recent

firm performance, insider ownership levels, and regular dividend policy, remain strongly associated with

the propensity to pay special dividends. We contribute to the literature by documenting that the

relationship between these firm characteristics and propensity to pay special dividends are conditioned on

the prevailing state of the economy, which can influence the growth options available to these firms. For

example, the positive effect of cash levels on the probability of paying a special dividend is magnified

when the economy is weak (as measured by NBER recessions, poor stock market performance, or high

volatility). This finding is consistent with managers having a lower opportunity cost of paying special

dividends when growth options for the firm are reduced. Interestingly, we show that when a proxy for

overall market liquidity shows credit conditions are constrained, the propensity to pay special dividends

based on cash alone is mitigated.

20

We find that the positive relationship between the firm’s propensity to distribute dividends and its

return on assets is attenuated during a weak economy, as firms with better performance may not be

pressured by their shareholders to distribute special dividends when economic conditions are weak. We

also show that firms with higher insider ownership are even more likely to issue special dividends when

the economy is weak. Furthermore, firms that commonly pay dividends are even more willing to provide

distribute special dividends when the economy is weak.

We also find some evidence that the share price response to special dividend announcements is

more favorable when economic conditions are weak. This result is consistent with the results summarized

above, because investors (like managers of firms) also recognize how the payment of special dividends

has an opportunity cost as reflected by their estimate of the firm’s prevailing growth options that are

available. The favorable share price response of a firm’s special dividend distribution is more

pronounced during weak economic conditions when its growth options are more limited. Furthermore, the

positive relationship between a firm’s share price response to a special dividend distribution and its cash

level is more pronounced during weak economic conditions when its investment opportunities are more

limited. Their share price response to a special dividend distribution is also more favorable during a

period of an expected increase in tax rates when the economy is weak.

Overall, our results offer evidence that managerial behavior of distributing special dividends and

the share price response to that behavior are closely associated with the availability of investment

opportunities. Firms are more willing to distribute special dividends when their growth options are more

limited, and investors respond more favorably to special dividends when the firm’s growth options are

more limited.

21

Table 1. Sample description

PANEL A:

Distribution of special dividends by year

Year Count Proportion Mean Special Div Min Special Div Max Special Div SD Special Div

2004 92 10.86% $1.49 $0.05 $20.00 3.1980

2005 104 12.28% $1.51 $0.02 $31.00 3.7034

2006 99 11.69% $1.10 $0.01 $10.20 1.6409

2007 100 11.81% $2.17 $0.01 $21.50 3.7405

2008 86 10.15% $1.42 $0.01 $25.00 3.1154

2009 52 6.14% $1.62 $0.02 $10.27 2.4046

2010 103 12.17% $1.57 $0.03 $13.74 2.5329

2011 55 6.49% $0.74 $0.01 $7.25 1.2648

2012 156 18.42% $1.85 $0.01 $29.00 3.3360

Total 847 100.00% $1.56 $0.01 $31.00 3.0148

PANEL B

Sample descriptive characteristics

CASH = total cash and marketable securities available scaled by total assets, DEBT = debt/assets ratio, CAPEX = capital expenditures in proportion to total

assets, ΔEPS = percentage change in EPS in the previous quarter, ROA = net income in proportion to total assets, INSIDE = proportion of insider ownership,

MKTBOOK = market/book ratio, COMMONPAY = dummy variable that is set equal to 1 if the firm provided quarterly dividends over the same period, and

zero if it did not, and TAXYEAR = dummy set to equal one if the distribution was in 2010 and 2012 and 0 otherwise. *** represents significance at the .01 level,

while ** represents significance at the .05 level, and * represents significance at the .10 level. All t-test use unequal variance.

Characteristic Special

Dividends

Sample

Control

Sample

Difference

(based on t-stat)

Special-Control

(p-value)

Wilcoxon

z-statistic for

difference

(p-value)

Weak

Economy16

Strong

Economy

Difference

(based on t-stat)

Weak-Strong

Wilcoxon

z-statistic for

difference

CASH 22.43% 16.73% 5.22%***(0.000) 6.00***(0.000) 23.11% 18.56% 4.55%*** (0.007) 2.60*** (0.001)

DEBT 14.24% 14.90% -0.66% (0.2818) -4.23**(0.000) 15.20% 14.33% 0.87% (0.2648) 0.06 (0.9513)

CAPEX 3.92% 4.14% -0.22 (0.2012) -1.07 (0.2826) 3.90% 4.04% -0.14% (0.3231) -0.74(0.4588)

ΔEPS 18.80% 4.96% 13.85%**(0.030) 3.26*** (0.000) -9.64% 15.66% -25.30% 0.1561) 2.29** (0.022)

ROA 9.02% 3.98% 5.04%***(0.000) 7.59***(0.000) 6.03% 7.65% -1.62** (0.027) -0.58 (0.6642)

INSIDE 19.81% 11.78% 4.74%***(0.000) 5.11*** (0.000) 22.91% 18.23% 0.67%* (0.088) 0.06 (0.9535)

MKTBOOK 2.83 1.92 0.91 (0.1752) 3.38***(0.007) 1.74 2.52 -0.78 (0.2265) -0.03 (0.9729)

COMMONPAY 95.94% 44.75% 51.19%***(0.000) -9.82***(0.000) 70.77% 67.39% 3.38%**(0.0413) 5.69*** (0.000)

TAXYEAR 30.57% 30.81% -0.023% (0.4581) -0.11 (0.1018) 22.57% 19.00% 3.56% (0.1217) -0.62 (0.1811)

16 Weak economy is defined following the monthly S&P 500 performance where weak months are assigned a dummy of 1. We use three alternative definitions of weak/strong economy in the

multivariate analysis.

22

Table 2. Logistic Regression Analysis of the Decision to Pay Dividends (Pooled Sample)17

Model: SpecialDiv=α + β1WEAK_ECONOMY+ β2CASH+ β3DEBT+ β4CAPEX+ β5ΔEPS+ β6ROA+ β7INSIDE+ β8MKTBOOK+ β9COMMONPAY + β10

TAXYEAR +β11 CASH*WD + β 12 DEBT*WD + β 13 CAPEX*WD + β 14ΔEPS*WD+ β 15ROA*WD+ β 16INSIDE*WD+ β17MKTBOOK *WD+ β

18COMMONPAY*WD+β 19SIZESPECIAL*WD + ε

The dependent variable is =1 if the company announced a special dividend distribution and 0, otherwise. All independent variables are defined as follows:

WEAK_ECONOMY = dummy variable set equal to 1 if the special dividend was announced during a weak economic period, and 0 if it was announced in a

strong economic period. CASH = total cash and marketable securities available scaled by the total assets, DEBT = debt/assets ratio, CAPEX = capital

expenditures in proportion to total assets, ΔEPS = percentage change in EPS from the previous year, ROA= NI/TA, INSIDE = proportion of insider ownership,

MKTBOOK = market/book ratio, COMMONPAY = dummy variable that is set equal to 1 if the firm provided regular quarterly dividends over the same period

and zero if it did not, TAXYEAR=1 if the dividend was declared in 2010 or 2012.*** represents significance at the .01 level, while ** represents significance at

the .05 level, and * represents significance at the .10 level.

Four different measures of the economy are used: (I) official NBER data with results in columns I where 1= recession and 0 otherwise. (II) The performance of

the SPY index by month. The top 25% worst performing months are assigned a 1 (weak economy) and the rest a 0 (good economy). (III) VIX level by month.

The top 25% highest months are assigned a 1 (high volatility=weak economy) and the rest a 0 (low volatility=good economy). (IV) Harford’s market liquidity

measure by quarter used as a continuous variable. It is defined as the spread between the average interest rate on commercial and industrial loans and the Federal

Funds rate.

Variable Sign expectation Model I NBER Model II SPY Model III VIX Model IV LIQ

WEAK_ECONOMY (+)/(-) 0.4123 (0.599) 0.1035 (0.751) -0.4217 (0.269) 0.0826 (0.156)

CASH (+) 2.6566 (0.000)*** 2.5138 (0.000)*** 2.3679 (0.000)*** 4.6103 (0.000)***

DEBT (-) 0.5241 (0.132) -0.2310 (0.413) 0.4960 (0.152) 0.6068 (0.418)

CAPEX (+)/(-) 0.8125 (0.498) 1.1474 (0.360) 0.6513 (0.591) 3.7554 (0.172)

ΔEPS (+) 0.0213 (0.024)** 0.0121 (0.531) 0.0178 (0.032)** 0.0737 (0.066)*

ROA (+) 0.9545 (0.073)* 1.2372 (0.036)** 0.8942 (0.087)* 2.1059 (0.018)**

MKTBOOK (+)/(-) -0.0001 (0.965) 0.0079 (0.790) -0.0002 (0.956) -0.0024 (0.690)

INSIDE (+) 1.2280 (0.043)** 1.313 (0.022)** 1.0140 (0.047)** 0.1210 (0.053)*

COMMONPAY (+) 3.4093 (0.000)*** 3.4838 (0.000)*** 3.2394 (0.000)*** 4.3853 (0.000)***

TAXYEAR (+) -18

0.0322 (0.812) 0.0172 (0.897) 0.0828 (0.940)

CASH*Weak (+) 0.8376 (0.044)** 1.1731 (0.030)** 2.8072 (0.015)** -0.4557 (0.025)**

DEBT*Weak (+)/(-) -0.4500 (0.630) 1.2375 (0.184) -0.9274 (0.414) -0.0335 (0.829)

CAPEX*Weak (+)/(-) 1.0967 (0.764) -1.3857 (0.659) 2.1276 (0.530) -0.6616 (0.252)

ΔEPS*Weak (+) 0.1040 (0.764) -0.0199 (0.713) 0.0285 (0.713) 0.0163 (0.102)

ROA*Weak (-) -1.4750 (0.204) -2.1640 (0.033)** -1.7234 (0.057)* -0.3157 (0.114)

INSIDE*Weak (+) 0.2220 (0.018)** 0.1460 (0.041)** 0.1030 (0.488) 0.0180 (0.081)*

MKTBOOK*Weak (+)(-) 0.0118 (0.657) 0.0899 (0.121) 0.0314 (0.609) 0.0009 (0.556)

17 Fixed effects logistic regression does not estimate intercepts. As an alternative model, we use logistic regression with no fixed effect without differences in results. 18 TAXYEAR was omitted from model I because of no within-group variance (for the weak economy tax dummy=1 subgroup).

23

COMMONPAY*Weak (+) 0.3337 (0.609) 1.8312 (0.011)** 2.0722 (0.010)*** 0.0079 (0.881)

TAXYEAR*Weak (+)(-) - 0.0090 (0.984) 0.4680 (0.444) -0.0419 (0.925) N 1,654 1,654 1,654 1,654

YEAR FE YES YES YES YES Pseudo R-squared 0.2838 0.3008 0.2890 0.2884

Model p-value 0.0000*** 0.0000*** 0.0000*** 0.0000***

24

Table 3. Share Price Response to Special Dividend Announcements in 2010 and 2012.

Value weighted, market adjusted model, with return data available from CRSP for a minimum 3 and maximum 255 days, beginning 46 days before the

announcement date. *** represents significance at the .01 level, while ** represents significance at the .05 level, and * represents significance at the .10 level.

Significance is displayed based on portfolio time series (CDA).

Panel A. CARs for special dividend firms and control group

Variable All firms Special Dividends Control Sample

T-statistic for difference

Special-Control (p-

value)

Wilcoxon

z-statistic for difference

Special-Control (p-

value)

CAR (-2,+2) 1.62% *** 2.94%*** 0.16% 7.25 ***(0.000) 7.85***(0.000)

CAR ( -1,+1) 1.49%*** 2.73%*** 0.12% 8.57***(0.000) 9.87***(0.000)

CAR (0) 0.49%*** 1.02%*** -0.14% 5.28***(0.000) 6.16***(0.000)

N 1,660 830 830

CARs for special dividends in weak and strong economic periods

Panel B: NBER

Variable All firms Weak Economy Strong economy

T-statistic for difference

Weak-Strong

Wilcoxon

statistic for difference

Weak-Strong

CAR (-2,+2) 2.94%*** 3.23%*** 2.90%*** 0.65 (0.2594) 0.526 (0.5986)

CAR ( -1,+1) 2.73%*** 2.87%*** 2.63%*** 0.02 (0.4920) 0.128 (0.8985)

CAR (0) 1.02%*** 0.92%** 1.05%*** -0.87 (0.1935) 1.306 (0.1916)

N 830 117 713

PANEL C: SPY

Variable All firms Weak Economy Strong economy

T-statistic for difference

Weak-Strong

Wilcoxon

statistic for difference

Weak-Strong

CAR (-2,+2) 2.94%*** 3.08%*** 2.34%*** 0.97 (0.1677) 1.521 (0.1282)

CAR ( -1,+1) 2.73%*** 2.82%*** 2.36%*** 0.40 (0.3435) 1.314 (0.1888)

CAR (0) 1.02%*** 1.09%*** 0.72%*** 0.50 (0.3099) 0.418(0.6761)

N 830 154 676

PANEL D: VIX

Variable All firms Weak Economy Strong economy

T-statistic for difference

Weak-Strong

Wilcoxon

statistic for difference

Weak-Strong

CAR (-2,+2) 2.94%*** 3.82%*** 2.79%*** 1.37 (0.0855)* 1.864 (0.0624)*

CAR ( -1,+1) 2.73%*** 3.24%*** 2.73%*** 0.67(0.2505) 1.539 (0.1237)

CAR (0) 1.02%*** 1.03%*** 1.02%*** 0.43 (0.3348) 0.526 (0.5986)

N 830 141 689

25

Table 4. Multivariate Analysis of Share Price Responses to Special Dividend Announcements (Pooled Sample)

Model: CAR ( -1,+1)=α + β1WEAK_ECONOMY+ β2 CASH+ β3DEBT+ β4CAPEX+ β5ΔEPS+ β6ROA+ β7INSIDE+ β8MKTBOOK+ β9COMMONPAY +

β10SIZESPECIAL+ β11BADPERF+ β 12 CASH*WD + β 13 DEBT*WD + β 14 CAPEX*WD + β 15ΔEPS*WD+ β 16ROA*WD+ β 17INSIDE*WD+ β18MKTBOOK

*WD+ β 19COMMONPAY*WD+ β 20BADPERF*WD + β 21SIZESPECIAL*WD+ ε

The dependent variable is the CAR (-1, +1). All independent variables are defined as follows: WEAK_ECONOMY = dummy variable set equal to 1 if the

special dividend was announced during a weak economic period, and 0 if it was announced in a strong economic period. CASH = total cash and marketable

securities available scaled by the total assets, DEBT = debt/assets ratio, CAPEX = capital expenditures in proportion to total assets, ΔEPS = percentage change in

EPS from the previous year, ROA= NI/TA, INSIDE = proportion of insider ownership, MKTBOOK = market/book ratio, COMMONPAY = dummy variable

that is set equal to 1 if the firm provided regular quarterly dividends over the same period, and zero if it did not, SIZESPECIAL = the dollar amount of the special

dividend per share as a percentage of net income, and BADPERF = dummy variable set equal to 1 for firms that experienced a decline in EPS over the previous

year and 0 if they experienced a zero or positive change in EPS over the previous year. *** represents significance at the .01 level, while ** represents

significance at the .05 level, and * represents significance at the .10 level.

Four different measures of the economy are used: (I) official NBER data with results in columns I where 1= recession and 0 otherwise. (II) The performance of

the SPY index by month. The top 25% worst performing months are assigned a 1 (weak economy) and the rest a 0 (good economy). (III) VIX level by month.

The top 25% highest months are assigned a 1 (high volatility=weak economy) and the rest a 0 (low volatility=good economy). (IV) Harford’s market liquidity

measure by quarter used as a continuous variable. It is defined as the spread between the average interest rate on commercial and industrial loans and the Federal

Funds rate.

Variable Sign expectation Model I NBER Model II SPY Model III VIX Model IV LIQ

Intercept (+) -0.0466 (0.331) -0.1082 (0.047)** -0.0529 (0.219) -0.1985 (0.028)**

WEAK_ECONOMY (+) 0.2552 (0.001)*** 0.1800 (0.001)*** 0.2504 (0.000)*** -0.0079 (0.131)

CASH (+) 0.033 (0.009)*** 0.0418 (0.028)** 0.0412 (0.003)*** 0.1304 (0.000)***

DEBT (+)/(-) -0.0104 (0.322) -0.0211 (0.025)** -0.0101 (0.312) -0.0297 (0.014)**

CAPEX (+) -0.0315 (0.322) -0.0068 (0.861) -0.0183 (0.701) -0.0861 (0.373)

ΔEPS (+) 0.0018 (0.022)** 0.0019 (0.020)** 0.0022 (0.007)*** 0.0075 (0.000)***

ROA (+) 0.0159 (0.033)** 0.0170 (0.078)* 0.0173 (0.278) -0.0307 (0.522)

MKTBOOK (+) 0.0002 (0.023)** 0.0002 (0.159) 0.0002 (0.038)** 0.0007 (0.008)***

INSIDE (+)/(-) 0.0010 (0.092)* 0.0006 (0.310) 0.0011 (0.029)** 0.0012 (0.338)

COMMONPAY (+) 0.0642 (0.218) 0.0479 (0.084)* 0.0066 (0.169) 0.0751 (0.242)

TAXYEAR (+) 0.0065 (0.225) 0.0032 (0.574) 0.0055 (0.314) -0.0757 (0.090)*

SIZESPECIAL (+) 0.1406 (0.002)*** 0.1801 (0.000)*** 0.1471 (0.000)*** 0.2333 (0.000)***

BADPERF (-) -0.0008 (0.141) -0.0090 (0.137) -0.0031 (0.579) -0.0065 (0.499)

CASH*Weak (+) 0.0111 (0.111) 0.0335 (0.035)** 0.0600 (0.047)* -0.0270 (0.000)***

DEBT* Weak (-) 0.0125 (0.723) 0.0270 (0.334) 0.0124 (0.707) -0.0102 (0.028)**

CAPEX* Weak (+)/(-) 0.0389 (0.792) -0.2160 (0.146) -0.0472(0.718) 0.0213 (0.337)

ΔEPS* Weak (+) 0.0063 (0.380) 0.0008 (0.979) -0.0026 (0.318) -0.0013 (0.000)***

ROA* Weak (+)(-) 0.0189 (0.077)* 0.0345 (0.053)* -0.0160 (0.706) 0.0043 (0.527)

INSIDE* Weak (+) 0.0020 (0.257) 0.0013 (0.253) -0.0005 (0.610) -0.0009 (0.668)

26

MKTBOOK*Weak (+)(-) 0.0015 (0.701) -0.0011 (0.781) -0.0055 (0.755) -0.0001 (0.107)

TAXYEAR*Weak (+)(-) 0.2597 (0.000)*** 0.0216 (0.202) 0.0363 (0.224) 0.1369 (0.093)*

SIZESPECIAL*Weak (+) 0.0156 (0.781) 0.1329 (0.018)** 0.0341 (0.576) 0.0191 (0.098)*

BADPERF*Weak (-) 0.0170 (0.310) 0.0142 (0.269) -0.0301 (0.327) 0.0006 (0.806)

N 830 830 830 830

Adjusted R-squared 0.1912 0.1817 0.1522 0.1877

YEAR FE YES YES YES YES

Model p-value 0.0000*** 0.0000*** 0.0000*** 0.0000***

Note: COMMONPAY*weak was omitted from because of high collinearity with other variables (VIF 6.86-7.88)

27

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