To What Extent are Future Earnings Related to Earnings and Dividend Changes?

Abstract

This paper investigates whether the information dividend changes convey about future earnings is dependent on changes in current earnings. Our results show that dividend changes are directly related to future earnings changes when the dividends and earnings change in the same direction. In contrast, firms that increase dividends when earnings decline do not outperform their counterparts that maintain dividends. Similarly, when firms reduce dividends in the face of increasing earnings, the dividend reducers do not under-perform their counterparts that maintain their dividends. Collectively, these results are consistent with the traditional theories that dividend changes convey information about future earnings only when current earnings changes reinforce the dividend information.