Regular Dividend Announcements and Future Unexpected Earnings: An Empirical Analysis

Previous studies have interpreted stock price reaction to dividend announcements as being consistent with the hypothesis that any changes are forecasts of future corporate profits. Recent studies seem to provide evidence to this effect. This study provides additional empirical evidence pertaining to the issue of whether quarterly cash dividend announcements convey useful information about a firm's future profitability, beyond that contained in contemporaneous quarterly earnings announcements. The association between unexpected changes in quarterly dividends and unexpected accounting earnings in subsequent quarters is examined, after controlling for information contained in past and current earnings series. The results, based on a large sample of regular quarterly cash dividend changes, indicate that firms that increased (decreased) their dividends realized, on average, greater (smaller) unexpected accounting earnings in subsequent periods than firms that did not change their dividends.     

The Earnings Information Content of Dividend Initiations and Omissions

Previous studies have found that dividend initiations and omissions convey important information about subsequent earnings changes. However, this finding may be subject to a sample survival bias. We find that survivorship does not affect the positive relation between dividend changes and past earnings changes. Also, we find dividend omitting firms are able to generate significantly positive earnings one to two years after the omission. However, contrary to previous findings, firms' earnings are not significantly increased following the dividend initiation. The results suggest that survivorship tends to bias inference toward finding that dividends signal future earnings.     

The Market's Differential Reactions to Forward-Looking and Backward-Looking Dividend Changes

Empirical evidence on the signaling hypothesis of dividends is weak and mixed. Recent studies find that dividend changes reflect mostly current and past earnings but not future earnings. We provide a model in which not all dividend changes contain new information about future earnings. Some dividend decisions are backward looking (noninformation or nonsignaling events). Other dividend decisions are forward looking (information or signaling events). The model helps identify the two types of dividend changes and predicts that the market will respond strongly only to forward‐looking dividend changes. We provide evidence consistent with the implications of the model.     

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. We 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.     

Do firms use dividend changes to signal future profitability? A simultaneous equation analysis

This paper retests the signaling hypothesis of dividends by examining whether managers change dividends to signal their expectation of earnings prospects using a simultaneous-equation approach. This approach allows us to more clearly test the earnings prospects signaling hypothesis and facilitates the control of several alternative motives that managers may have for changing dividends. We also examine the information content of dividend changes with respect to future earnings changes in the same model system. Our results show that managers change dividends to signal equity-scaled rather than asset-scaled earnings prospects. In addition, we find evidence that managers also change dividends for signaling previous earnings changes and for catering to dividend clienteles. As for the information content of dividend changes, we find that dividend changes have significant and negative impact on ROA changes. The findings suggest that if investors consistently cannot recognize the signaling purpose and find that dividend increases (decreases) are not useful in predicting favorable (unfavorable) future earnings, managers may someday give up using dividend changes to signal the earnings prospects of their firms because they cannot obtain the expected market benefits anymore.     

Dividend Policy in Switzerland

The paper examines dividend policy for a sample of Swiss companies. Several factors that determine cross-sectional variations in dividend policy – such as profitability, growth opportunities, and riskiness – are identified. Price volatility seems to stand out as the most significant factor. Looking at the relationship between dividends and earnings over time, dividend changes are more closely linked to past and current rather than future net income growth. However, they do confirm a persistent shift in the level of earnings. There is also a significant relationship between losses and dividend cuts. These findings suggest that it is the managers’ reluctance to cut dividends that gives informational content to dividend changes.     

Do stock splits signal future profitability?

This study examines whether stock split announcements contain information content about future profitability, measured in terms of future earnings change, future earnings, or future abnormal earnings. We find that the split announcement year has the highest earnings change and the earnings change declines substantially over the subsequent five years. Our empirical results show little evidence that stock splits are positively related to future profitability. In fact, stock splits are in general negatively related to future profitability in subsequent years after the announcement, except for dividend-paying firms with a split factor less than 0.5. This negative relation holds regardless of future profitability measure. Therefore, our empirical finding suggests that stock splits are not useful signals of a firm’s future earnings prospects. JEL Classification G30     

The Effect of Past Earnings and Dividend Patterns on the Information Content of Dividends When Earnings Are Reduced

This study pursues two objectives: first, to provide evidence on the information content of dividend policy, conditional on past earnings and dividend patterns prior to an annual earnings decline; second, to examine the effect of the magnitude of low earnings realizations on dividend policy when firms have more‐or‐less established dividend payouts. The information content of dividend policy for firms that incur earnings reductions following long patterns of positive earnings and dividends has been examined ( DeAngelo et al., 1992, 1996 ; Charitou, 2000 ). No research has examined the association between the informativeness of dividend policy changes in the event of an earnings drop, relative to varying patterns of past earnings and dividends. Our dataset consists of 4,873 U.S. firm‐year observations over the period 1986–2005. Our evidence supports the hypotheses that, among earnings‐reducing or loss firms, longer patterns of past earnings and dividends: (a) strengthen the information conveyed by dividends regarding future earnings, and (b) enhance the role of the magnitude of low earnings realizations in explaining dividend policy decisions, in that earnings hold more information content that explains the likelihood of dividend cuts the longer the past earnings and dividend patterns. Both results stem from the stylized facts that managers aim to maintain consistency with respect to historic payout policy, being reluctant to proceed with dividend reductions, and that this reluctance is higher the more established is the historic payout policy.     

The dynamics of dividends,earnings and prices: evidence and implications for dividend smoothing and signaling

This paper examines the dynamic relations among corporate dividends, earnings and prices, and the implications of these relations for dividend signaling and smoothing. A multiple hypotheses testing method is employed to identify causal relations among the three financial variables and to test the empirical implications of dividend smoothing and signaling models. The results show that dynamic relations exist among dividends, earnings and prices. Empirical evidence is consistent with the contention that dividend changes are often driven by both signaling and smoothing motives. Additional tests are developed to differentiate between the dividend signaling and smoothing models. These tests impose restrictions on the dynamics of the financial variables and information signaling. It is found that dividend changes frequently provide information about unexpected changes in future earnings for a little more than a year.     

The market's perception of the information conveyed by dividend announcements

This paper tests whether the market perceives announced dividend changes to reflect information about current and/or future cash flows. The empirical relationship between dividend changes and earnings changes is inconclusive. Furthermore, there is no empirical evidence regarding the market's perception of managers' intentions in changing the level of dividends. By analyzing the price reaction of scores to an announced dividend change, we are able to isolate the effects of a short-term change and a long-term change. Our findings indicate that the market perceives dividend changes to reflect a long-term change in earnings.     

Tax Expense Momentum

We investigate the joint hypothesis that (1) tax expense contains information about core profitability that is incremental to reported earnings and (2) that information is reflected in stock prices with a delay. We find that seasonally differenced quarterly tax expense, our proxy for tax expense surprise, is related positively to future returns. This anomaly is separate from previously documented pricing anomalies based on financial and tax variables. Additional investigation reveals that tax expense surprise is related positively to changes in future quarterly earnings and tax expense, and both those future changes are related positively to future returns. While the returns to investing in predictable future earnings changes has been documented before, these results suggest that predicting changes in future tax expense also generates incremental future returns.     

Prior Information and the Market Reaction to Dividend Changes

We investigate two hypotheses regarding the information content of dividend change announcements. The first is that the importance of information signaled by a dividend change depends on the reliability of earnings forecasts existing before the dividend announcement. The second hypothesis is that the stock price reaction to dividend change announcements is related to earnings forecast error as of the time of the dividend announcement. Our results reveal that dividend increases convey more information for firms in which financial analysts least accurately predict earnings. The results also indicate that dividend increase and decrease announcements provide market participants with information which, on average, allows them to differentiate between firms on the basis of future earnings realizations. These differential information effects are shown to be robust to price, size, dividend yield, and overinvestment effects.     

Dividend policy and permanence of earnings

We examine managers’ adjustment of dividends to information about earnings. We base our analysis on a ‘permanent earnings’ model of dividend behavior, which implies that dividends are changed primarily in response to permanent changes in earnings; transitory earnings changes have little or no effect on dividends. Within the permanent earnings framework, the permanent component of earnings may be the predominant factor affecting dividend payouts, or it may be one of the important factors affecting dividends. In the former case earnings and dividends are co-integrated; in the latter they are not. Using a sample of 337 firms over the 40 year period from 1950–1989, we find the data to be strongly consistent with the permanent earnings model. We also find that the data are more consistent with a model that relates dividend and earnings changes rather than levels. Thus, we conclude that earnings and dividends are not co-integrated. This contrasts with the implicitly co-integrated (levels) dividend model of Lintner (1956), and indicates that factors other than the permanent component of earnings, such as tax policy, clientele effects, transaction costs, etc. may have a significant impact on the long-run behavior of dividends.     

我国上市公司现金股利的信息内涵实证分析

股利的信号传递理论认为股利的变化意味着企业未来盈利能力的变化，即股利有信息内涵。但国内外学者仅仅从收益角度来分析股利的信息内涵，所得到的实证结果与理论假设并不一致。本文从上市公司信息风险和未来盈利能力相结合的角度探讨股利的信息内涵。实证结果表明我国上市公司现金股利变化包含收益和风险两方面的信息，上市公司应该根据对未来现金流持续性的预期来制定现金股利政策。     

DIVIDEND CHANGE ANNOUNCEMENT EFFECTS AND EARNINGS VOLATILITY AND TIMING

Recent modeling using the asymmetric information framework suggests that the magnitude of a market response to dividend change announcements should be related to the timing of the dividend announcement vis-a-vis the earnings release and to the stability of those earnings. The announcement effects of regular quarterly dividend changes are tested and these effects are related to the percentage change in the dividend yield, to the stability of the firm's earnings, to the timing of dividend and earnings announcements, and to the level of earnings compared with prior quarters. Analysis indicates that significant relationships exist between the announcement effect and changes in the dividend yield, and whether the dividend change is positive or negative. Only weak evidence exists that dividend announcement effects are larger when current earnings are unknown.     

基于信号传递假说的上市公司股票送转财务效应研究

基于信号传递假说,选取在沪深两市上市的2003～2009年期间实施了送股、转增或股票送转的A股上市公司作为样本,对上市公司股票送转财务效应进行实证分析。研究表明:一方面,上市公司实施股票送转的确存在财务效应,盈利能力、发展能力、资产管理能力与偿债能力在公司实施股票送转后均显著增强,但是整体而言,股票送转的财务效应存在一定的滞后性,一般为一个季度;另一方面,上市公司股票送转的财务效应强度与送转比成正比例关系,且财务效应的强度也随着公司的盈利能力与成长性的增长而增强。     

The Predictive Ability of Dividend and Earnings Yields for Long-Term Stock Returns

We use empirical models to examine the predictive ability of dividend and earnings yields for long‐term stock returns. Results show that dividend and earnings yields share a similar predictive power for future stock returns and growth. We find that the predictive power of dividend yields increases with the return horizon, but that yields forecast future returns and growth over a much longer horizon. Finally, dividend and earnings yields exhibit high autocorrelation and strong contemporaneous relations.     

Do dividend changes predict the future profitability of firms?

Many previous studies have been conducted to test whether corporate dividend changes predict the future profitability of firms. While the debate continues, we assess the information content of dividends (ICD) hypothesis in the Korean market as it provides an interesting experimental setting for testing the hypothesis in the context of corporate governance. We find that it is difficult to support the ICD hypothesis if one accepts nonlinear patterns in earnings. However, when we divide the sample in terms of Chaebol vs. non‐Chaebol and high‐growth vs. low‐growth firms, we find that the ICD hypothesis becomes valid, especially for non‐Chaebol firms and for low‐growth firms. Therefore, we suggest that the validity of the ICD hypothesis may be dependent on firm characteristics such as the corporate governance structure and growth stage.     

Earnings Response Coefficients and Dividend Policy Parameters

In a seminal paper. Ball and Brown (1968) documented a positive statistical association between earnings surprises and stock returns around an earnings announcement. They concluded that accounting earnings conveyed ‘useful’ information to the market. However, the question of how accounting earnings convey useful information is still being understood. Recent work on this topic has found that current accounting earnings aid investors and analysts in predicting future accounting earnings. Few studies, however, have examined the usefulness of current earnings for predicting other value-relevant attributes. A model by Ohlson (1989a) suggests that investors are also interested in the relationship between current earnings and future dividends. Ohlson's model is supported by empirical tests in this paper which show that the relationship between current earnings and future dividends is significant in explaining cross-sectional variation in earnings response coefficients (ERCs). A second result of interest is that information in dividends substitutes for that in accounting earnings. We find that dividend policy parameters reflect information contained in current earnings. These results add new insights on the information revealed through the analysis of ERCs. Consistent with logic presented here, a symmetrically opposite result is found with respect to dividend response coefficients. The informativeness of earnings (dividends) is found to be negatively (positively) related to the information content of dividends.     

The Association Between Operating Cash Flows and Dividend Changes: An Empirical Investigation

The Association between earnings and dividend changes has been established since Lintner's (1956) pioneering work. Subsequent research attempted to establish an association between operating cash flows and dividend changes, given earnings, without success (Simons, 1994). Recently, there has been increased attention in cash flow reporting. Regulatory bodies worldwide have stressed the significance of cash flow information in capital markets. Research on the association between cash flows and dividends has been limited, yielding inconclusive results. The purpose of this study is to re-evaluate and extend prior studies by examining the incremental ability of cash flows to explain dividend changes, given earnings. We argue that a positive relationship between cash flows and dividend changes should exist due to liquidity and accruals management considerations. The empirical evidence of this study supports that the dividend changes-cash flow relationship is significantly positive (a) when operating cash flows are low compared to earnings, and (b) when firm growth is moderate.