Do Changes in Dividends Signal the Future or the Past

Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. The authors investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years -1 and 0, but show no subsequent unexpected earnings growth. Also, the size of the dividend increase does not predict future earnings. Firms that cut dividends in year 0 have experienced a reduction in earnings in year 0 and in year -1, but these firms go on to show significant increases in earnings in year 1. However, consistent with Lintner's model on dividend policy, firms that increase dividends are less likely than nonchanging firms to experience a drop in future earnings. Thus, their increase in concurrent earnings can be said to be somewhat 'permanent'. In spite of the lack of future earnings growth, firms that increase dividends have significant (though modest) positive excess returns for the following three years. Copyright 1997 by American Finance Association.

[1]  Roni Michaely,et al.  Trading Volume with Private Valuation: Evidence from the Ex-Dividend Day , 1996 .

[2]  Harry DeAngelo,et al.  Reversal of fortune dividend signaling and the disappearance of sustained earnings growth , 1996 .

[3]  L. Starks,et al.  Signaling, Investment Opportunities, and Dividend Announcements , 1995 .

[4]  Theo Vermaelen,et al.  Market Underreaction to Open Market Share Repurchases , 1994 .

[5]  Roni Michaely,et al.  Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift? , 1994 .

[6]  J. Aharony,et al.  Regular Dividend Announcements and Future Unexpected Earnings: An Empirical Analysis , 1994 .

[7]  Harry DeAngelo,et al.  Dividends and Losses , 1992 .

[8]  B. Bernheim.  Tax Policy and the Dividend Puzzle , 1990 .

[9]  Anand M. Vijh,et al.  Dividend clienteles and the information content of dividend changes , 1990 .

[10]  S. Penman,et al.  FINANCIAL STATEMENT ANALYSIS AND THE PREDICTION OF STOCK RETURNS , 1989 .

[11]  D. Siegel,et al.  Corporate Financial Policy, Information, and Market Expectations: An Empirical Investigation of Dividends , 1987 .

[12]  A. Thakor,et al.  A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchase and Dividends , 1987 .

[13]  A. Kalay,et al.  The informational content of the timing of dividend announcements , 1986 .

[14]  Merton H. Miller,et al.  Dividend Policy under Asymmetric Information , 1985 .

[15]  S. Penman.  The Predictive Content of Earnings Forecasts and Dividends , 1983 .

[16]  James A. Brickley.  Shareholder wealth, information signaling and the specially designated dividend: An empirical study☆ , 1983 .

[17]  Joseph T. Williams,et al.  Dividends, Dilution, and Taxes: A Signalling Equilibrium , 1983 .

[18]  J. Aharony,et al.  Quarterly Dividend and Earnings Announcements and Stockholders' Returns: An Empirical Analysis , 1980 .

[19]  Guy Charest,et al.  Dividend information, stock returns and market efficiency-II , 1978 .

[20]  Nicholas J. Gonedes.  Corporate Signaling, External Accounting, And Capital-Market Equilibrium - Evidence On Dividends, Income, And Extraordinary Items , 1978 .

[21]  E. Fama,et al.  Dividend Policy: An Empirical Analysis , 1968 .

[22]  P. Asquith,et al.  The Impact of Initiating Dividend Payments on Shareholders' Wealth , 1983 .

[23]  Wealth Information.  Brickley, James. , Shareholders and the Specially Designated Dividend: An Empirical Study, Journal of Financial Economics 2, . , 1983 .

[24]  Sudipto Bhattacharya,et al.  Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy , 1979 .

[25]  J Nicholas,et al.  Gonedes, Nicholas. , Corporate and Capital Market Equilibrium: Evidence on Dividends, Income, and Extraordinary Items, Journal of Accounting Research 1, . , 1978 .

[26]  K. A. Rainbow.  The information content of dividends , 1974 .

[27]  Ross L. Watts,et al.  The information content of dividends , 1973 .

[28]  F. Modigliani,et al.  DIVIDEND POLICY, GROWTH, AND THE VALUATION OF SHARES , 1961 .

[29]  J. Lintner.  DISTRIBUTION OF INCOMES OF CORPORATIONS AMONG DIVIDENDS, RETAINED EARNINGS AND TAXES , 1956 .