Dividend Changes Do Not Signal Changes in Future Profitability
Rice University - Jesse H. Jones Graduate School of Business
Johnson@Cornell Tech, Cornell University; Interdisciplinary Center (IDC)
University of California at Los Angeles
Richard H. Thaler
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
October 7, 2003
One of the most important predictions of the dividend-signaling hypothesis is that dividend changes are positively correlated with future changes in profitability and earnings. Contrary to this prediction, we show that after controlling for the well-known non-linear patterns in the behavior of earnings, dividend changes contain no information about future earnings changes. We also show that dividend changes are negatively correlated with future changes in profitability (return on assets). Finally, we investigate the out-of-sample forecasting ability of dividend changes. We find that models that include dividend changes do not outperform those that do not include dividend changes. In fact, our evidence indicates that investors are better off not using dividend changes in their earnings forecasting models.
Number of Pages in PDF File: 38
JEL Classification: M41, G35, G12
Date posted: October 8, 2003
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