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Predicting Future Earnings Growth: A Test Of The Dividend Payout Ratio In The Australian Market

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  • Anthony Flint
  • Andrew Tan
  • Gary Tian

Abstract

This paper examines the use of the payout ratio as a predictor of a firm’s future earnings growth. Recent evidence rejects the hypothesis that firm which retain a large portion of their earnings have strong future earnings growth. Higher dividend payout ratios instead correspond to higher future earnings growth. Examining both listed and delisted firms on the Australian stock exchange over the period 1989 to 2008, we provide further evidence that the dividend payout ratio is positively linked to future earnings growth. The results hold over both one, three and five year periods. Furthermore, our results rejected claims that such a relationship was caused by simple mean reversion in earnings. We find no evidence to support the cash flow signaling and free cash flow hypotheses as an explanation for this relationship.

Suggested Citation

  • Anthony Flint & Andrew Tan & Gary Tian, 2010. "Predicting Future Earnings Growth: A Test Of The Dividend Payout Ratio In The Australian Market," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 4(2), pages 43-58.
    • Handle: RePEc:ibf:ijbfre:v:4:y:2010:i:2:p:43-58
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    Cited by:

    1. Tzu-Chun Sheng & Alvin Chang & Shu-Hui Lan & Shih-Cheng Li, 2020. "Analysis of the Dividend Policy Decision-Making Mechanism of Chinese and Taiwanese Lithium Battery Industries," Mathematics, MDPI, vol. 8(10), pages 1-16, October.
    2. Rehab khan & Jamshad Khurshid Meer & Rab Nawaz Lodhi & Faisal Aftab, 2017. "Determinants Of Dividend Payout Ratio: A Study Of Kse Manufacturing Firms In Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 13(1), pages 13-12.
    3. Rehab khan & Jamshad Khurshid Meer & Rab Nawaz Lodhi & Faisal Aftab, 2017. "Determinants Of Dividend Payout Ratio: A Study Of Kse Manufacturing Firms In Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 13(1), pages 12-24.
    4. Adler Haymans Manurung & Nera Marinda Machdar & John Edward Harly Jacob FoEh & Jhonni Sinaga, 2024. "Dividend Policy as a Moderating of the Effect of Dividend Announcement on Stock Price in Indonesian Firms," International Journal of Economics and Financial Issues, Econjournals, vol. 14(4), pages 96-105, July.

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    More about this item

    Keywords

    Predicting Future Earnings Growth; Dividend Payout Ratio; Australian Market;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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