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Do dividends convey information about future earnings?

Author

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  • Ham, Charles G.
  • Kaplan, Zachary R.
  • Leary, Mark T.

Abstract

Yes. We show that dividend changes contain information about highly persistent changes in future economic income. Three methodological differences lead us to different conclusions from the extant literature: (i) we use an “event window approach” to cleanly delineate earnings after dividend changes from those before, (ii) we use alternative earnings measures to control for endogenous investment and asset write-downs surrounding dividend changes, and (iii) we control for the nonlinear relation between dividend changes and market reactions. Our results suggest dividend announcement returns reflect information about the level of permanent earnings, though the timing of the information content is difficult to reconcile with traditional signaling models.

Suggested Citation

  • Ham, Charles G. & Kaplan, Zachary R. & Leary, Mark T., 2020. "Do dividends convey information about future earnings?," Journal of Financial Economics, Elsevier, vol. 136(2), pages 547-570.
    • Handle: RePEc:eee:jfinec:v:136:y:2020:i:2:p:547-570
    DOI: 10.1016/j.jfineco.2019.10.006
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    More about this item

    Keywords

    Payout policy; Dividends; Earnings expectations;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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