Dividends Revisited: An In-Depth Look at the Relationship between Dividends and Earnings

Abstract

We flnd that dividend increases are associated with signiflcant positive shifts in average earnings, while dividend decreases are associated with signiflcant negative shifts in average earnings. Moreover, earnings over the years following dividend increases will be higher than the previous level of dividends, while they will be a lower for most dividend decreases. This quite robust flnding points can be related to managers’ aversion to dividend cuts documented in Brav, Graham, Harvey and Michaely (2005). Since managers increase dividends when they are reasonably sure that future earnings will be high enough and only reduce dividends when they are forced to do so by the poor prospects of the flrm, dividend changes will contain useful information for earnings performance in the medium term.