Dividends Revisited: An In-Depth Look at the Relationship between Dividends and Earnings

59 Pages Posted: 17 Mar 2006

Date Written: March 2006

Abstract

We find that dividend increases are associated with significant positive shifts in average earnings, while dividend decreases are associated with significant negative shifts in average earnings. Moreover, earnings over the years following dividend increases will be higher than the previous level of dividends, while they will be a lower for most dividend decreases.

This quite robust finding points can be related to managers' well-documented aversion to dividend cuts. Since managers increase dividends when they are reasonably sure that future earnings will be high enough and only reduce dividends when they are forced to do so by the poor prospects of the firm, dividend changes will contain useful information for earnings performance in the medium term.

Keywords: Dividend policy, Managerial Behavior, Average Earnings

JEL Classification: G35

Suggested Citation

Stacescu, Bogdan, Dividends Revisited: An In-Depth Look at the Relationship between Dividends and Earnings (March 2006). Available at SSRN: https://ssrn.com/abstract=890740 or http://dx.doi.org/10.2139/ssrn.890740

Bogdan Stacescu (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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