Abstract
We analyze simultaneous announcements of current dividends, current earnings and management forecasts of next year's earnings. By conducting the empirical analysis using Danish data, this study is the first not to suffer from problems related to low levels of agency costs and informational asymmetries between shareholders and management. We find that the stock market reacts to the surprise in management forecasts of next year's earnings and the current dividend. Additional breakdowns reveal that the signalling models and free cash flow hypothesis provide explanations for separate components of the market reaction. Thus, our results do not support the dividend irrelevancy proposition.
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