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Do Changes in Dividends Signal the Future or the Past?

Shlomo Benartzi, Roni Michaely and Richard Thaler
The Journal of Finance
Vol. 52, No. 3, Papers and Proceedings Fifty-Seventh Annual Meeting, American Finance Association, New Orleans, Louisiana January 4-6, 1997 (Jul., 1997), pp. 1007-1034
Published by: Wiley for the American Finance Association
DOI: 10.2307/2329514
Stable URL: http://www.jstor.org/stable/2329514
Page Count: 28
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Do Changes in Dividends Signal the Future or the Past?
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Abstract

Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. We investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years -1 and 0, but show no subsequent unexpected earnings growth. Also, the size of the dividend increase does not predict future earnings. Firms that cut dividends in year 0 have experienced a reduction in earnings in year 0 and in year -1, but these firms go on to show significant increases in earnings in year 1. However, consistent with Lintner's model on dividend policy, firms that increase dividends are less likely than nonchanging firms to experience a drop in future earnings. Thus, their increase in concurrent earnings can be said to be somewhat "permanent." In spite of the lack of future earnings growth, firms that increase dividends have significant (though modest) positive excess returns for the following three years.

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