Surprise! Higher Dividends = Higher Earnings Growth

Robert D. Arnott

Research Affiliates, LLC

Clifford S. Asness

AQR Capital Management, LLC

Financial Analysts Journal, Vol. 59, No. 1, January/February 2003

We investigate whether dividend policy, as observed in the payout ratio of the U.S. equity market portfolio, forecasts future aggregate earnings growth. The historical evidence strongly suggests that expected future earnings growth is fastest when current payout ratios are high and slowest when payout ratios are low. This relationship is not subsumed by other factors, such as simple mean reversion in earnings. Our evidence thus contradicts the views of many who believe that substantial reinvestment of retained earnings will fuel faster future earnings growth. Rather, it is consistent with anecdotal tales about managers signaling their earnings expectations through dividends or engaging, at times, in inefficient empire building. Our findings offer a challenge to market observers who see the low dividend payouts of recent times as a sign of strong future earnings to come.

Keywords: Portfolio Management: asset allocation; Investment Theory: efficient market theory

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Date posted: May 27, 2003  

Suggested Citation

Arnott, Robert D. and Asness, Clifford S., Surprise! Higher Dividends = Higher Earnings Growth. Financial Analysts Journal, Vol. 59, No. 1, January/February 2003. Available at SSRN: https://ssrn.com/abstract=390143

Contact Information

Robert D. Arnott (Contact Author)
Research Affiliates, LLC ( email )
620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8700 (Phone)
949-325-8901 (Fax)
HOME PAGE: http://www.researchaffiliates.com/Our%20Firm/Our%20Team/Pages/Rob-Arnott.aspx
Cliff S. Asness
AQR Capital Management, LLC ( email )
Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203-742-3601 (Phone)
203-742-3101 (Fax)
HOME PAGE: http://www.aqrcapital.com

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