Dividend Changes, Profitability and Earnings - A Study of Indian Manufacturing Firms

Abstract:     
We observe significant valuation revisions around divined changes. The price reaction to dividend initiations and omissions are more compared to the dividend increase/decrease sample. We analyze the relationship between dividend changes and future profitability/earnings using categorical analysis and regression analysis. There is a strong relationship between the dividend changes and earnings/profitability changes for the corresponding year. Dividend initiating (omitting) firms have large increase (decrease) in profitability in the year of change compared to dividend increasing (decreasing) firms. We found that dividend changes provide information about the level and change in profitability in the immediately succeeding year, but not thereafter. The availability of financial results for the next quarter/half year may discount the signaling argument as a valid explanation. Generally positive dividend changes are associated with somewhat permanent increase in earnings in the year of announcements.

Number of Pages in PDF File: 37

Keywords: Dividend, signaling, earnings, profitability

JEL Classification: G35, M41

working papers series