Attention to Dividends, Inattention to Earnings?

61 Pages Posted: 19 Dec 2019 Last revised: 19 May 2020

See all articles by Charles (Chad) Ham

Charles (Chad) Ham

Washington University in St. Louis - John M. Olin Business School

Zachary Kaplan

Washington University in St. Louis - John M. Olin Business School

Steven Utke

University of Connecticut - Department of Accounting

Date Written: May 18, 2020

Abstract

In frictionless markets dividends are irrelevant to firm value (Miller and Modigliani 1961), but in practice we propose that they affect valuation and stewardship, roles traditionally filled by accounting information. Using a variety of econometric methods to control for differences between dividend paying and non-dividend paying firms, we show weaker price and volume reactions to earnings announcements (EAs) for payers, consistent with investors using dividend information as a substitute for earnings information. We show the probability of just meeting or beating (missing) earnings estimates is lower (higher) for dividend payers relative to non-payers, consistent with managers responding to the decreased attention to earnings by engaging in less earnings management. Valuation tests show payers have lower earnings response coefficients and less persistent earnings surprises, consistent with the availability of a permanent earnings signal (i.e., the dividend) substituting for permanent earnings information otherwise extracted from EAs. Collectively, this evidence suggests dividends impact the information environment, and although costly, could be an efficient way for some firms to satisfy investors’ demand for information.

Keywords: dividends, information environment, earnings announcements, earnings management

JEL Classification: G35, M41

Suggested Citation

Ham, Charles and Kaplan, Zachary and Utke, Steven, Attention to Dividends, Inattention to Earnings? (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3497913 or http://dx.doi.org/10.2139/ssrn.3497913

Charles Ham

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Zachary Kaplan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Steven Utke

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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