First, since scrip dividends are announced at the same time as earnings, the announcement-date abnormal returns are likely to be affected by other factors contained in the reports, not linked to the scrip option at all.
In this section, I extend the analysis by linking the likelihood of paying scrip dividends to the hypotheses stated in the previous section.
Column 2 reports the results of the cash-shortage hypothesis and shows that firms that issue scrip dividends have significantly higher debt-to-equity ratios and higher dividend yields.
Column 4 of Table 5 reports that large firms and those with lower investment opportunities, as measured by Tobin's q, are more likely to issue scrip dividends than smaller and growth firms.
There does not appear to be any statistically significant relation between the likelihood of issuing scrip dividends and the subsequent growth in earnings, dividends, and/or share prices.
This variable should be negative if the decision to use scrip dividends is motivated by the free-cash-flow paradigm.
Column 2 shows that the dummy variable low CF x high q has a significant negative coefficient, suggesting that firms that are unlikely to have free-cash-flow problems do not issue scrip dividends.
those with higher cash flow and lower growth opportunities, are more likely to issue the scrip option, while those that need cash to finance their growth potentials (low CF x high q) are less likely to issue scrip dividends.
This implies that the payment of scrip dividends is not motivated by cash shortage.
In contrast to what is widely claimed, companies do not issue scrip dividends because of ACT recoverability problems.
The results also show that scrip dividends do got signal cash shortage and/or financial distress.