Should managers refrain from and investors ignore noisy dividend surprises? Some experimental evidence

A series of experiments is conducted in an asset market that contains a high productivity firm and a low productivity firm. Managers' compensation is a positive function of the market determined value of the firm. Investment decisions are made endogenously and are private information to the managers. The results of the experiments indicate that managers signal earning's information via noisy dividend announcements that result in suboptimal investment decisions. A manager's overinvestment in the signal does not generate significant increases in managerial compensation. The noisy signal does not pay off and in fact would result in a tendency for the market to underpredict earnings. This implies that even in the presence of suboptimal contracts between the managers and the firms, managers are not overcompensated. Thus, in these experiments the signal does not “solve” the dividend puzzle.