Information Environment, Dividend Changes, and Signaling: Evidence from ADR Firms*

While theory suggests that dividends can be an important credible signal for firm performance, prior studies have been unable to provide strong evidence of dividend signaling among publicly listed U. S. companies. One potential explanation for this inconsistency between theory and empirical evidence is that the cross-sectional variation in information asymmetry across U. S. firms is insufficient to provide adequate test power. In this study, we revisit the link between dividend signaling and firms' information environment by examining the dividend behavior of foreign firms that cross-list on the U. S. stock market in the form of American Depository Receipts (ADRs). Our evidence suggests that ADR firms with poorer information environments have stronger incentives to adopt dividend increases as a credible signaling device. We also find that such firms experience an increase in one-year-ahead earnings and a decline in systematic risk following a dividend increase. Additional analysis shows that ADR firms have fewer other information channels compared to similar U. S. firms. Overall, we provide evidence consistent with the importance of dividend signaling, especially for firms with poorer information environments.