Quarterly Dividend and Earnings Announcements and Stockholders' Returns: An Empirical Analysis

Abstract

ASSUMING THAT MANAGERS POSSESS inside about their firms' future prospects, they may use various signaling devices to convey this to the public. Two of the most important signaling devices available are earnings and dividend figures. The information content of hypothesis asserts that managers use cash dividend announcements to signal changes in their expectations about future prospects of the firm.' Since dividend decisions are almost solely at management's discretion,2 announcements of dividend changes should provide less ambiguous signals than earnings numbers. Furthermore, given the discrete nature of dividend adjustments, signals transmitted by these changes may even provide beyond that conveyed by the corresponding earnings numbers. If dividends, then, do convey useful information, in an efficient capital market this will be reflected in stock price changes immediately following a public announcement. It is, therefore, an empirical question whether dividend content is useful to capital market participants. A major difficulty in assessing dividend content lies in the fact that dividend and earnings announcements often are closely synchronized. Thus, one has first to adequately identify reflected in both earnings and dividends and then consider the remainder of the conveyed by dividend announcements.