Thus, it seems possible that companies issue scrip dividends to invest the cash saved in non-positive-NPV projects.
One possible explanation for why companies pay scrip dividends could be that managers issue the scrip option for their own benefit, for example, to trade on insider information.
It does so by comparing the financial performance of firms that issued scrip dividends over the period 1987-1992 to industry-matched control firms that paid only cash dividends.
A deeper understanding of the influences of these additional factors will enable us to understand why firms pay scrip dividends.
1) Since scrip dividends increase the issued share capital, the total amount of dividends paid must be increased for the dividend-per-share to be increased or maintained.
4) See Sections 230 and 249 to 251 of the Inland and Corporation Taxes Act 1988 (as amended) and Sections 141 and 142 of the Taxation of Chargeable Gains Act 1992 for the tax treatment of scrip dividends.
1 do not analyze the enhanced scrip dividends in this paper because they were issued as "one off" by a relatively small number of companies in 1993.
10) For example, I find that 66% of the constituents of the FTSE 100 Index, the London Stock Exchange 100 largest companies, pay scrip dividends.
Although one year subsequent to the payment of scrip dividends may be too short a period, an extension may produce confounding effects and misspecification of long-horizon tests.
15) I have also used other measures of cash shortage, such as interest cover and net cash flow from operations over interest paid, and find that companies that issue scrip dividends do not appear to be short of cash.
If a scrip dividend is used by managers to signal a favorable outlook to the market, then scrip-paying firms' subsequent earnings and dividends should be higher.