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Historical Cost Earnings versus Inflation-Adjusted Earnings in the Dividend Decision

Sasson Bar-Yosef and Baruch Lev
Financial Analysts Journal
Vol. 39, No. 2 (Mar. - Apr., 1983), pp. 41-50
Published by: CFA Institute
Stable URL: http://www.jstor.org/stable/4478627
Page Count: 10
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Historical Cost Earnings versus Inflation-Adjusted Earnings in the Dividend Decision
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Abstract

Historically, changes in dividend payout ratios have been strongly associated with changes in reported earnings. Has the advent of inflation and inflation-adjusted accounting changed this relationship? In other words, do corporations take into account the effects on earnings of inflation and specific price changes when making the dividend decision? An examination of the relationship between dividends and six price-adjusted earnings measures (including constant dollar and current cost income from continuing operations both with and without purchasing power gains) indicates only very weak correlations. Conventionally reported historical cost earnings remain the "best" measure in terms of accounting for dividend changes. For the investor, this means that the various price-adjusted earnings data reported under Financial Accounting Standards Board Statement No. 33 will convey very little useful information about firms' dividend decisions.

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