38 Pages Posted: 8 Oct 2003
Date Written: October 7, 2003
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: 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