Are Dividends Informative About Future Earnings?
44 Pages Posted: 21 Feb 2007
Date Written: January 31, 2007
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: Suggested Citation