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Dividend Changes Do Not Signal Changes in Future Profitability

38 Pages Posted: 8 Oct 2003  

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

Roni Michaely

Johnson@Cornell Tech, Cornell University

Shlomo Benartzi

University of California at Los Angeles

Richard H. Thaler

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: October 7, 2003

Abstract

One of the most important predictions of the dividend-signaling hypothesis is that dividend changes are positively correlated with future changes in profitability and earnings. Contrary to this prediction, we show that after controlling for the well-known non-linear patterns in the behavior of earnings, dividend changes contain no information about future earnings changes. We also show that dividend changes are negatively correlated with future changes in profitability (return on assets). Finally, we investigate the out-of-sample forecasting ability of dividend changes. We find that models that include dividend changes do not outperform those that do not include dividend changes. In fact, our evidence indicates that investors are better off not using dividend changes in their earnings forecasting models.

JEL Classification: M41, G35, G12

Suggested Citation

Grullon, Gustavo and Michaely, Roni and Benartzi, Shlomo and Thaler, Richard H., Dividend Changes Do Not Signal Changes in Future Profitability (October 7, 2003). Available at SSRN: https://ssrn.com/abstract=431762 or http://dx.doi.org/10.2139/ssrn.431762

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~grullon/

Roni Michaely (Contact Author)

Johnson@Cornell Tech, Cornell University ( email )

111 8th Avenue #302
New York, NY 10011
United States

Shlomo Benartzi

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-206-9939 (Phone)
310-267-2193 (Fax)

Richard H. Thaler

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-5208 (Phone)
773-702-0458 (Fax)

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