How Important are Dividend Signals in Assessing Earnings Persistence?

Posted: 2 Aug 2018

See all articles by Carsten Homburg

Carsten Homburg

University of Cologne

Christian Müller

University of Cologne

Julia Nasev

Ludwig-Maximilians-University Munich

Date Written: July 2, 2018

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 Müller, Christian and Nasev, Julia, How Important are Dividend Signals in Assessing Earnings Persistence? (July 2, 2018). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3223649

Carsten Homburg

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Christian Müller

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Julia Nasev (Contact Author)

Ludwig-Maximilians-University Munich ( email )

Geschwister-Scholl-Platz 1
Munich, 80539
Germany

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