Reversal of Fortune: Dividend Policy and the Disappearance of Sustained Earnings Growth

Posted: 14 Sep 1999  

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Linda DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Douglas J. Skinner

The University of Chicago - Booth School of Business

Abstract

Managers of more than two-thirds of 145 NYSE firms responded to stalled earnings growth by increasing dividends, with most increases at least as large as the dividend increase in the peak earnings year. These dividend increases are difficult to reconcile with signalling models since (i) most firms' prior sustained earnings growth evaporated, and (ii) there is essentially no relation between favorable dividend signals and future earnings. The stock market recognized the reduced growth earnings, with average abnormal returns of - 17.65 percent in the year of the initial earnings decline and -41.40 percent cumulated over that and the next three years. We find some evidence that sample firms' dividend policies reflect behavioral biases that lead managers to send overly optimistic signals.

JEL Classification: G35

Suggested Citation

DeAngelo, Harry and DeAngelo, Linda and Skinner, Douglas J., Reversal of Fortune: Dividend Policy and the Disappearance of Sustained Earnings Growth. Available at SSRN: https://ssrn.com/abstract=5379

Harry DeAngelo (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6541 (Phone)
213-740-6650 (Fax)

Linda DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-3868 (Phone)
213-740-6650 (Fax)

Douglas J. Skinner

The University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7137 (Phone)

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