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How Important Are Dividend Signals in Assessing Earnings Persistence?

46 Pages Posted: 2 Jul 2012 Last revised: 14 Apr 2017

Carsten Homburg

University of Cologne

Christian Mueller-Hammerstein

University of Cologne

Julia Nasev

University of Cologne

Date Written: April 13, 2017

Abstract

We build and test a Bayesian model that shows how investors revise their earnings persistence expectations after dividend announcements. When dividend changes confirm preceding earnings changes, our model predicts inverse u-shaped investor revisions conditional on the prior expectations for noisy dividend signals. As the dividend signal becomes more informative our model predicts that investor revisions will become more skewed converging to a monotonically decreasing relation for perfectly informative dividend signals. When dividend changes contradict preceding earnings changes, our model predicts u-shaped investor revisions. In empirical tests, we find results generally consistent with our model predictions.

Keywords: Information Release, Dividends, Earnings Persistence, Investor Revision

JEL Classification: G14, G35, M41

Suggested Citation

Homburg, Carsten and Mueller-Hammerstein, Christian and Nasev, Julia, How Important Are Dividend Signals in Assessing Earnings Persistence? (April 13, 2017). Available at SSRN: https://ssrn.com/abstract=2097485 or http://dx.doi.org/10.2139/ssrn.2097485

Carsten Homburg

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Christian Mueller-Hammerstein (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Julia Nasev

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany
+492214706830 (Phone)
+492214705012 (Fax)

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