Testing Dividend Signalling Models

This paper derives a key monotonicity property common to all dividend signaling models: the greater the rate that dividend income is taxed relative to capital gains income, the greater the value of information revealed by a given dividend, and hence the greater the associated excess return. This monotonicity condition is tested with robust non-parametric techniques. No evidence is found to support dividend signaling models. The same results are inconsistent with tax-based CAPM arguments