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Dividend changes and information about future profitability: an application of difference GMM

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  • Tai-Yuan Chen
  • Lie-Jane Kao

Abstract

This research examines whether dividend changes convey information about future profitability. The difference GMM approach is employed to overcome the heterogeneity and endogeneity problems inherent in dynamic panel data models. Our evidence shows that previous abnormal earnings are a good predictor for subsequent abnormal earnings. Other than previous abnormal earnings, only dividend increases are strongly related to future profitability. Subsequent to dividend increases, profitability can last for four years. On the other hand, dividend decreases, initiations and omissions tend to reflect only concurrent profit performance. It is possible that previous abnormal earnings convey the most information about subsequent profitability, undermining the signalling of the dividend changes.

Suggested Citation

  • Tai-Yuan Chen & Lie-Jane Kao, 2014. "Dividend changes and information about future profitability: an application of difference GMM," Applied Economics Letters, Taylor & Francis Journals, vol. 21(7), pages 505-508, May.
    • Handle: RePEc:taf:apeclt:v:21:y:2014:i:7:p:505-508
    DOI: 10.1080/13504851.2013.870648
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    Cited by:

    1. Małgorzata Snarska & Tomasz K. Wisniewski & Andrzej Zygula, 2020. "Are Emerging Markets Efficient? Evidence from Informational Content of Dividend Changes in Polish Stock Market," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 687-717.
    2. Michael Adusei & Ngozi Adeleye & Anthony Okafor, 2021. "Drivers of credit union penetration: An international analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 710-723, April.
    3. Xiaoting Wei & Cameron Truong & Viet Do, 2020. "When are dividend increases bad for corporate bonds?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(2), pages 1295-1326, June.
    4. Chokri Zehri & Zagros Madjd‐Sadjadi, 2024. "Capital flow management and monetary policy to control credit growth," Economics and Politics, Wiley Blackwell, vol. 36(2), pages 637-676, July.
    5. Dong, Kangyin & Taghizadeh-Hesary, Farhad & Zhao, Jun, 2022. "How inclusive financial development eradicates energy poverty in China? The role of technological innovation," Energy Economics, Elsevier, vol. 109(C).
    6. Ijaz Ali & Noor Muhammad & Ali Gohar, 2017. "Do Firms Use Dividend Changes to Signal Future Earnings? An Investigation Based on Market Rationality," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(4), pages 20-34, April.

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