Are Dividends Informative About Future Earnings?

44 Pages Posted: 21 Feb 2007

See all articles by Michelle Hanlon

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Terry J. Shevlin

University of California-Irvine

Date Written: January 31, 2007

Abstract

This paper investigates whether dividends are informative about a firm's future earnings. We examine this issue by investigating the association between current year stock returns and current and future earnings for firms that pay dividends in the current year as compared to firms that do not pay dividends. The data reveal that relative to non-dividend paying firms, dividend paying firms have current returns that are more associated with future earnings. In addition, we report results consistent with the market having a better understanding of a firm's future earnings after a dividend initiation relative to before. Overall, our results are consistent with dividends providing relevant information about future earnings to the market that is not in current earnings and that this information is incorporated into stock price.

Keywords: Dividends, Information Content, Earnings

JEL Classification: G12, G35, H25

Suggested Citation

Hanlon, Michelle and Myers, James N. and Shevlin, Terry J., Are Dividends Informative About Future Earnings? (January 31, 2007). Available at SSRN: https://ssrn.com/abstract=964279 or http://dx.doi.org/10.2139/ssrn.964279

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

James N. Myers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Terry J. Shevlin (Contact Author)

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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