Do dividends convey information about future earnings? Charles

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Do dividends convey information about future earnings?
Charles Ham
Assistant Professor
Washington University in St. Louis
[email protected]
Zachary Kaplan
Assistant Professor
Washington University in St. Louis
[email protected]
Mark Leary
Associate Professor
Washington University in St. Louis
[email protected]
Do dividends convey information about future earnings?
Abstract
Yes. We find that dividend changes predict future unexpected earnings changes in each of the
next four quarters. These earnings impacts are persistent, leading to higher than expected earnings
levels for at least three years after the dividend change. These results are robust to various
measures of expected earnings, including analyst forecasts and a flexible function of past earnings
and returns. Second, dividend announcements convey this earnings information to investors.
Market reactions to dividend changes are positively related to future earnings changes, and
analysts revise their forecasts after the dividend change to completely correct their previous errors.
We further find the information content of dividends is larger for dividend cuts, relative to
increases, and when information asymmetry is higher. Our study differs from prior research,
which finds either no evidence of information content or only short-horizon information content,
in that we use quarterly data to delineate earnings announced before and after the dividend change.
1.
Introduction
In the absence of any market frictions, dividend payouts have no effect on valuation
(Modigliani and Miller 1961). In practice, though, it is well documented that market valuations
respond sharply to announcements of dividend changes.1 The two leading theoretical explanations
for the positive association between dividend changes and stock prices are the “information content
hypothesis,” which argues that dividend changes convey information about future earnings (Miller
and Rock 1985; Bhattacharya 1979), and the “free cash flow hypothesis” (Jensen 1986) in which
payouts constrain managers from over-investing or consuming perquisites. Empirical studies have
largely cast doubt on the information content hypothesis, leading many observers to emphasize
agency or behavioral explanations. The most damaging evidence against the information content
hypothesis has been provided by studies documenting that dividend changes, while correlated with
current or past earnings, do not predict future earnings changes.2 This is surprising given that the
vast majority of CFOs agree that dividend decisions convey information to investors (Brav et al.
2005).
In this paper, we re-examine the information content of dividend changes by defining more
precisely the timing of dividend declarations relative to subsequent earnings announcements. In
particular, we use an “event window” approach where we compare earnings announced prior to
the dividend declaration to those announced after the declaration. This approach assumes that any
earnings announced after the dividend change were (at least partially) unknown to investors at the
time of the dividend declaration. The event window approach differs from the “fiscal year”
approach predominantly used in the prior literature, which groups earnings and dividend changes
into fiscal years, and then examines changes across fiscal years. The fiscal year approach has a
1
2
See, for example, Pettit (1972), Aharony and Swary (1980), and Grullon et al. (2002).
See, for example, Benartzi, et al. (1997) and Grullon et al. (2005).
2
tendency to categorize earnings announced after the dividend change but before the end of the
fiscal year as current or past earnings realizations (Watts 1973; Benartzi et al. 1997). We document
that this timing difference has a substantial impact on one’s conclusions about whether dividend
changes contain information content about future earnings.
Convincingly testing the proposition that dividends have information content requires
properly controlling for the earnings the market would expect in the absence of the dividend
change. Because of the challenges inherent in measuring earnings expectations, we test the
information content hypothesis in three settings, each with different assumptions about
pre-dividend declaration earnings expectations.
We first use a regression approach that controls for expected earnings changes with a set
of linear and non-linear controls for past levels and changes in earnings (Fama and French 2000;
Grullon et al. 2005) as well as past returns (Ball and Brown 1968). Our results suggest that
earnings are higher than would be expected in the absence of a dividend change for each quarter
of the first year after the dividend change. We further show that this higher earnings level persists
for at least three years following the dividend change. These results are unaffected by controlling
for an interaction between past earnings changes and dividends, suggesting that dividends do not
solely convey information about the persistence of past earnings changes. We also find that the
information content of a dividend change depends on its direction. Dividend cuts predict changes
in earnings that are 2-3 times larger than that of dividend increases, consistent with extant evidence
that the market reactions to dividend cuts are larger than those to dividend increases (e.g., Grullon
et al. 2002).
We also examine whether dividend changes have information content for revenue or gross
profit, income statement line items that are less affected by timing choices such as the immediate
3
expensing of period costs and asset write-downs (Donnelson et al. 2011; Novy-Marx 2013). We
find that dividend changes also have a positive and persistent association with revenue and gross
profit, mitigating concern that our main results are caused by accounting choices that cause
accounting income to deviate from economic income.
As an extension of the regression approach, we conduct a matching analysis where we
compare dividend decrease and increase firms to similar firms that leave their dividends
unchanged. We continue to find dividend changes predict future earnings changes and that these
differences persist for several years.
To reconcile our results with the prior literature, we re-estimate our regressions calculating
earnings changes over fiscal years, which leads some earnings realized after the dividend change
to be included in the prior fiscal year’s earnings. We find dividends no longer predict future
earnings changes, consistent with prior research (Watts 1973; Gonedes 1978; Benartzi et al. 1997;
Grullon et al. 2005).
In our second approach, we study the impact of dividend change announcements on analyst
earnings forecasts. This approach has two advantages.
First, analyst forecasts provide an
alternative measure of expected earnings, which incorporates soft information available to market
participants and has been shown to provide accurate forecasts of future earnings (Brown et al.
1987). Second, it enables us to test whether analysts (arguably those investors who study corporate
earnings most closely) properly infer the earnings information in dividend change announcements.
We show three main results. First, dividend changes are significantly positively related to
forecast errors for forecasts made prior to the dividend change. That is, for firms that increase
(cut) their dividend, future earnings realizations are higher (lower) than analysts expected before
the dividend change. Second, following the dividend announcement, analysts revise their earnings
4
forecasts in the direction of the dividend change. Dividend cuts are associated with forecast
revisions that are 3.5 times larger than those for dividend increases. These results suggest analysts
view the dividend change as conveying information relevant to forecasting earnings.3 Third, these
revisions completely reverse the errors in pre-dividend forecasts. We find errors from forecasts
issued after dividend declarations have no association with the prior dividend change. Interpreting
pre-announcement forecasts as a measure of earnings expectations, these results reinforce those in
the regression approach by showing that dividend increases (decreases) are associated with
increases (decreases) in future earnings relative to expectations. They further highlight that
analysts (correctly) interpret dividend changes as containing information about future earnings.
In our third set of tests, we examine the link between the market reaction to dividend
changes and future earnings. If markets are reasonably efficient, earnings expectations prior to the
dividend announcement should already be impounded in the stock price. In this case, any change
in expectations should be reflected in the announcement return. We document a significant
positive correlation between the cumulative abnormal return in the three-day window surrounding
a dividend change announcement and earnings changes over the subsequent four quarters. This
provides further evidence that investors comprehend the information content in dividend changes.
To isolate the information content of the dividend change itself from other earnings news,
we make two comparisons. First, the relation between announcement-window returns and future
earnings changes is more than twice as large when firms change their dividends than when the
announced dividend is the same as the previous quarter. Second, among dividend changing firms,
3
Unlike prior research (Carroll, 1995; Yoon and Starks, 1995), we include only those forecasts made between the
prior earnings announcement and the dividend declaration or between the dividend declaration and the next earnings
announcement to ensure that the forecast revisions are not impacted by any new earnings announcements.
5
returns during the dividend announcement window are much more highly correlated with future
earnings changes than are returns in the week prior or the week after the declaration date.
If dividends convey information about future earnings that is known to managers but not
investors, we would expect the predictability of dividend changes for earnings changes to be more
pronounced when there is more information asymmetry between insiders and outside investors
(Bhattacharya 1979; Miller and Rock 1985). We therefore investigate whether the information
content of dividends varies cross-sectionally with proxies for the level of information asymmetry
between managers and investors.
We first find that dividend declarations contain more information about future earnings
when they occur later in the quarter. Just after the earnings announcement, managers should have
a smaller information advantage (Verrecchia 1982; Diamond 1985), and thus investors should
update less in response to dividend news. Second, dividends have less information content for
firms that change their dividend frequently. If dividend changes convey the managers’ private
information, we expect that frequently changing the dividend in the past will reduce information
asymmetry, leading subsequent dividend changes to convey less information. Third, we use six
proxies for information uncertainty in the extant literature (Zhang 2006): (i) return volatility, (ii)
cash flow volatility, (iii) analyst forecast volatility, (iv) analyst coverage, (v) firm size, and (vi)
firm age. With the exception of firm age, in each case we find dividend changes by firms with
greater information uncertainty have more information content.
We note that while these results are consistent with dividend signaling theories, we have
not shown that managers consciously bear deadweight costs in order to signal. In fact, firms
release dividend declarations more frequently in the beginning of the quarter than at the end,
6
suggesting that in some ways firms time the release of dividend information to limit its information
content.
These results have several implications. First, they help our understanding of the market
response to dividend changes. If dividend changes do not convey information about future
earnings, the price reaction to dividend changes is somewhat puzzling.
Prior studies have
suggested that dividend increases indicate either a reduction in risk (Grullon et al. 2002) or an
increase in the fraction of earnings that will be paid out to investors due to a reduction in the agency
cost of free cash flow. While our evidence does not rule out these alternative explanations, we
document clear predictability of dividend changes and their associated market reactions for future
earnings changes. Second, our results suggest that investors understand the earnings information
contained in dividend announcements – both the direction and the magnitude of announcement
returns and analyst forecast revisions are correlated with future changes in earnings.
Our conclusion stands in contrast with the current consensus that there is little empirical
support for the information content hypothesis or signaling theories of dividends (see, for example,
reviews by Allen and Michaely (2002) and DeAngelo et al. (2009)). This difference between our
conclusions and those of much of the prior literature derives from our approach to defining future
earnings changes.
First, by utilizing an “event window” approach, we ensure that all earnings announcements
made after a dividend announcement are considered future earnings. Indeed, to the extent that
managers have private information about earnings, this could pertain to any earnings realizations
that have not yet been announced. Second, we calculate future earnings changes relative to
earnings in the year or quarters prior to the dividend change, while controlling for the earnings
changes that would be expected given pre-dividend earnings patterns. Benartzi et al. (1997) point
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out that after the first several quarters following a dividend change, earnings do not continue to
grow at a faster rate for firms that increase their dividend. However, we show that the new earnings
levels that result from faster growth in the first four quarters after the dividend change persist for
at least three years after the change. At the same time, our results suggest that dividend changes
do not simply reflect the persistence of past earnings changes (Koch and Sun 2004; Skinner and
Soltes 2011). Rather, dividend changes predict earnings changes in the quarters following the
announcement that have a persistent impact on future earnings levels.
The remainder of the paper is organized as follows. The next section reviews the related
literature and discusses testable hypotheses for the information content view of dividends. Section
3 describes our data and sample selection. In section 4, we present results of our three approaches
to testing for the information content of dividends. Section 5 documents the cross-sectional relation
between the information content of dividend announcements and proxies for information
asymmetry. We offer concluding remarks in Section 6.
2.
Literature review and hypothesis development
In this section, we first briefly review the theoretical literature on dividend signaling and
the information content view of dividends. We then review the prior empirical literature testing
whether dividend declarations predict future earnings changes. To place our findings in context,
we classify studies as either “event window” studies – those which classify all earnings realizations
after the dividend declaration as future earnings – or “fiscal year” studies – those which classify
earnings realizations as future if they occur the fiscal year after the dividend declaration. Most
studies adopting an “event window” methodology find evidence consistent with dividends having
8
short-horizon information content about future earnings, while the majority of studies using a
“fiscal year” approach find evidence inconsistent with the information content hypothesis.
2.1.
Theory and hypotheses
The seminal dividend irrelevance model of Miller and Modigliani (1961) assumes, among
other things, that managers and outside investors have the same information with respect to
investment policy and the value of future cash flows. However, differences in information
between insiders and investors are likely to be prevalent in financial markets in practice. Indeed,
Miller and Modigliani (1961) discuss the possibility that changes in the dividend level will be
interpreted by investors as reflecting a change in managers’ views of the firm’s future growth
prospects. They suggest this as a means of reconciling the observed price reaction to dividend
changes with their irrelevance proposition.4,5 As discussed by Miller and Rock (1985), this
information content can arise simply through the sources and uses of cash identity. That is, if the
firm’s investment policy is known or inferred by investors, then the dividend, net of any capital
raised, allows investors to back out the (unobserved) earnings.
However, Miller and Rock also point out that this version of the information content
hypothesis is only sustainable in equilibrium under restrictive assumptions. In particular, if
managers have any incentive to boost the current stock price, rather than solely maximizing
fundamental value, they might lower investment or take other measures to increase the current
This relaxation of perfect markets in itself does not undermine Miller and Modigliani’s dividend irrelevance
proposition, since in this case it is the information about earnings, rather than the dividend per se that is relevant for
valuation.
5
We note that other (non-mutually exclusive) explanations have been offered for the price reaction to dividend
changes. Following Easterbrook (1984) and Jensen (1986), higher dividends may reduce the free cash flow subject to
managerial discretion, thereby increasing the fraction of future earnings captured by investors. Alternatively, Grullon
et al. (2002) suggest that dividend increases reflect a reduction in risk, and therefore a lower discount rate, as firms
mature. Given our focus on the earnings information content of dividends, we refer the reader to excellent reviews by
Allen and Michaely (2003), DeAngelo et al. (2009) and Kalay and Lemmon (2011) for fuller treatments of these
alternate views.
4
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dividend. This possibility for manipulation, in turn, would undermine the information content of
dividends if investors are rational.
One way in which information content can be restored in equilibrium is if increasing the
dividend is costly enough to discourage manipulation by firms whose future earnings prospects
don’t warrant the increase. This idea has been formalized in a number of dividend signaling
models, which differ primarily in the assumed cost of paying a high dividend. Bhattacharya (1979)
presents a model in which committing to a high dividend exposes firms to a higher likelihood of
having to raise costly external financing in the future. In Miller and Rock (1985), the cost of
increasing the dividend is a departure from optimal investment policy, while John and Williams
(1985) focus on the tax cost of dividends relative to capital gains. However, in all of these models,
the dividend announcement allows investors to infer managers’ private information about current
and future profitability.
Dividend signaling models, or the information content hypothesis more generally, have
several testable implications. First, if dividend decisions are a function of managers’ private
information about current and future earnings, dividend increases (decreases) should be associated
with subsequent increases (decreases) in earnings realizations. Second, if investors recognize the
earnings news reflected in dividend announcements, dividend changes should be greeted by price
changes in the same direction. Related, investors should update their expectations about future
earnings following announced dividend changes.
2.2.
Empirical tests of the information content of dividends
There is a lengthy literature testing whether dividends have information content, commonly
defined as information about unexpected future earnings changes. While a few studies support the
information content view of dividends (Ofer and Siegel 1987; Aharony and Dotan 1994; Yoon and
10
Starks 1995; Nissim and Ziv 2001), most large sample empirical studies argue dividend changes
contain little or no information about future earnings (Watts 1973; Gonedes 1978; Penman 1983;
Lang and Litzenberg 1989; DeAngelo et al. 1996; Benartzi et al. 1997; Grullon et al. 2002; Grullon
et al. 2005).6 Commentary in recent review papers on payout policy suggests the current consensus
is that there is little empirical support for the information content of dividends. For example,
DeAngelo et al. (2009) state “Knowledge of the fact that a firm has increased its dividend generally
does little to improve forecasts of future earnings over and above what outsiders can infer from
current earnings” (p. 99) and “Researchers have struggled to find evidence that dividend increases
are reliable signals of future earnings increases” (p. 185). Allen and Michaely (2003) opine
similarly “the overall accumulated evidence does not support the assertion that dividend changes
convey information about future earnings” (p. 73).
Our review of the empirical literature suggests one research design choice has a dramatic
influence on the probability a study will confirm or contradict the information content hypothesis.
The pivotal research design choice is whether the study computes earnings changes using an event
window approach or whether the study computes earnings changes over the fiscal year. In the
event window methodology, earnings (or earnings expectations) immediately following the
dividend declaration are compared to earnings prior to the dividend declaration. In the fiscal year
methodology, dividend changes are aggregated over a fiscal year. These studies then compare
earnings changes in the fiscal year following the dividend declaration to earnings changes in the
year in which the firm declared the dividend change. The majority of studies employing the “fiscal
year” approach do not support the information content hypothesis. Specifically, seven studies find
6
We exclude studies from our review that use a small subset of dividend paying stocks, such as Brickley (1983),
which studies earnings changes for thirty-five firms that change their dividend. We also exclude studies examining
dividend omissions and dividend initiations.
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no information content (Watts 1973; Gonedes 1978; Penman 1983; DeAngelo et al. 1996; Benartzi
et al. 1997; Grullon et al. 2002; Grullon et al. 2005), while only two support information content
(Aharony and Dotan 1994; Nissim and Ziv 2001). Eight of these studies follow the fiscal year
methodology and seven of those find no information content.7
Perhaps the most comprehensive of these studies is Benartzi et al. (1997). Using both a
regression and matched-sample approach, the authors show that dividend changes are highly
correlated with earnings in the current or past fiscal years. However, dividend increases are
uncorrelated with earnings growth in the subsequent fiscal years, while dividend cuts are actually
followed by earnings increases. Nissim and Ziv (2001) argue that controlling for mean reversion
in earnings produces results more consistent with the information content of dividends. They
perform similar tests as Benartzi et al. (1997), but add lagged return on equity and lagged earnings
changes to control for changes in earnings predicted by financial statement variables. However,
Grullon et al. (2005) argue these findings are highly sensitive to the manner of controlling for
mean reversion and demonstrate that controlling for non-linearity in mean reversion restores the
conclusions of Benartzi et al (1997).
The only study in this set, of which we are aware, with results that support the information
content hypothesis and have not been challenged is Aharony and Dotan (1994).
Not
coincidentally, this study uses an event window methodology. However, this study shows positive
information content for only two quarters after the dividend change and negative information
content in the fourth quarter. It is unclear whether evidence that the association between dividend
changes and earnings changes varies with horizon should be interpreted as consistent or
inconsistent with information content. We expand on the methodology in the study by including
7
Several of these studies consider dividend changes in the first quarter of the subsequent fiscal year as part of the
prior fiscal year’s earnings.
12
extensive controls for pre-dividend declaration earnings and returns, which allows us to isolate the
unexpected information content in the dividend change and delivers consistent results across the
earnings horizon. We also make several additional contributions. First, we highlight the source of
discrepancy between their findings and the bulk of the related literature. Second, we demonstrate
how dividend announcements affect investor expectations by linking the information content of
dividends to analyst forecast revisions and announcement period returns. Third, we use crosssectional tests to document that the information content of dividends is more pronounced in
settings of greater information asymmetry.
In contrast to studies examining information content using actual earnings changes where
the fiscal year approach is the norm, the three studies of which we are aware using analyst forecasts
all use an event study methodology where they compare expectations for the same time period
before and after the dividend. Two of the three studies find significant information content (Ofer
and Siegel 1987; Yoon and Starks 1995) while one does not (Lang and Litzenberg 1989).
However, all these prior studies use summary files, which offer only approximate information
about the timing of revisions. A limitation of such a research design is that these studies cannot
rule out the possibility that the information causing the revision was either (i) a concurrent earnings
release, or (ii) information released before the dividend declaration (Allen and Michaely 2003).
By using the I/B/E/S detail file, we are able to ensure that we compare only forecasts made after
the previous earnings release but before the dividend change to forecasts made between the
dividend change and the next earnings release. Further, we remove the impact of analyst-specific
biases by only including forecasts made by the same analyst before and after the dividend change.
3.
Sample selection and descriptive statistics
13
We obtain data on dividend declarations from the CRSP events database. We first select
all ordinary quarterly dividend declarations (distribution code 1232) over the period 1972 – 2014
for which the firm made a previous quarterly dividend declaration in the past 180 days. 8 This
allows us to compute the percentage dividend change. We limit the sample to: (i) firms listed on
the NYSE, AMEX, or Nasdaq exchanges, (ii) ordinary common stocks (i.e., those with share code
10 or 11), and (iii) non-financial firms (we exclude firms with a four digit SIC beginning with six).
We also exclude: (i) dividend declarations for which the firm declared a distribution other than a
quarterly dividend between the declaration dates of the current and prior quarterly dividends, to
focus our analysis on the information content of quarterly dividends (Benartzi et al. 1997; Nissim
and Ziv 2001), and (ii) firms that split their shares between the month of the prior dividend
declaration and the month of the current dividend declaration, as splits affect the information
content of dividend changes (Nayak and Prabhala 2001). We require data on CRSP to compute
dividend declaration announcement returns and past returns. We obtain earnings data from the
CRSP/Compustat Merged database and require twelve consecutive quarters of earnings to
calculate seasonal earnings changes around the dividend declaration (i.e., four earnings changes
before and after the declaration). We winsorize all continuous variables at the top and bottom one
percent to mitigate the influence of outliers, except the percentage dividend change for which we
set all dividend increases larger than 200% to 200%.9
8
The first year earnings announcements were available on Compustat is 1972.
Several dividend increase observations are extremely large in percentage terms, so to mitigate their influence we
winsorize the percentage dividend change at +200%. We do not winsorize dividend decreases because they are
bounded at -100% and dividend decrease observations comprise just over 1% of the sample. We winsorize all
variables involving earnings at the top and bottom one percent for two reasons: (i) the distribution of changes in
earnings values is highly kurtotic and skewed so extreme values account for much of the variance in earnings changes
(Grammery and Gerakos 2014), and (ii) large changes in accounting income have little relation with economic income
(Freemen and Tse 1992). All standard errors are clustered by year of the dividend declaration.
9
14
Table 1 presents descriptive statistics for our sample. As shown in Panel A, 85.0% of
dividend declarations maintain the prior dividend level, while 14.0% (1.0%) increase (decrease)
the dividend. Although dividend decreases are less frequent, they tend to have a larger percentage
effect on the dividend. The average decrease reduces the dividend by 49.8% (Panel C) while the
average increase raises the dividend by 19.6% (Panel D). The average decrease has announcement
window returns of -2.6% while the average increase has announcement window returns of only
0.8%, suggesting a greater reaction to dividend decreases. Declarations that change the dividend
tend to be preceded by returns of the same sign as the dividend change, suggesting at least some
of the information affecting the decision to change the dividend was released to the market before
the dividend declaration. Examining earnings changes, we find positive (negative) earnings
changes for firms that increase (decrease) the dividend in the four quarters before and after the
dividend declaration (except four quarters ahead for dividend decreases). The goal of our
empirical tests is to identify the portion of the post-dividend declaration earnings change that is
unexpected.
4.
Do dividend changes predict future earnings changes?
In this section, we test whether dividend changes have information content about future
earnings via three distinct approaches. First, we estimate the relation between dividend changes
and future earnings changes in a regression approach where we include variables suggested by the
extant literature to control for expected earnings changes in the absence of any dividend change.
We also augment this approach with a matched sample approach that compares earnings changes
for dividend changers to non-dividend changers with similar characteristics. Second, we use
analyst forecasts of earnings to examine whether dividend changes predict forecast revisions and
15
forecast errors. Third, we infer changes in earnings expectations from market prices and examine
whether stock returns on dividend declaration days contain more information about future earnings
relative to comparable days during the period.
4.1.
A regression approach to testing for information content
In our first approach to testing for the information content in dividend changes, we regress
earnings changes on the percentage dividend change (ΔDIV) and a series of control variables.
Eit+n = β0 + β1DIVit + βjControls + ε
(1)
E is the change in earnings using income before extraordinary items (IBQ) from the
CRSP/Compustat merged quarterly file. All earnings changes are computed as the difference
between earnings announced after the dividend change and earnings for the same period in the
prior year (before the dividend change) and scaled by the market value of equity the quarter before
the dividend announcement, similar to Benartzi et al. (1997). We calculate earnings changes over
five different horizons: one, two, three, and four quarters ahead, as well as one year ahead which
is the sum of the four quarterly changes after the dividend announcement. Refer to Figure 1 for a
visual depiction of the earnings change calculations. If a dividend declaration occurs the day of
an earnings announcement, we use the earnings announced at the time of the dividend change as
the prior quarter’s earnings. We cluster all standard errors by the year of the dividend declaration.
We present the results from estimating equation (1) in Table 2. In column (1), we regress
the annual change in earnings (E(y+1)), calculated as the sum of the four quarterly earnings values
following the dividend change minus the sum of the four quarterly earnings values before the
dividend change, on the percentage dividend change (DIV). We find a highly significant
coefficient on the dividend change (β=0.028; t=4.2), which suggests a 50% increase in the dividend
corresponds to an increase in earnings equal to 1.4% of the market value of equity of the firm.
16
One concern with our results measuring information content is that the earnings changes
associated with the dividend change might have been expected in the absence of the dividend
change. To address this concern, in column (2) we include the four past quarterly earnings changes
and four past earnings levels. We find our coefficient estimates and significance levels are
unchanged by the inclusion of these variables, suggesting the univariate finding of information
content cannot be explained by past earnings changes. In column (3), we include non-linear
functions of the annual earnings change and level (Fama and French 2000; Grullon et al., 2005),
to more fully control for variation in expected earnings changes associated with past earnings
realizations.10 We also include five variables capturing returns over the 240 trading days before
the dividend announcement, to capture information about expected earnings changes impounded
into returns (Ball and Brown 1968). We continue to find a highly significant coefficient on the
dividend change (β=0.024; t=4.1).
Prior literature suggests at least some results are sensitive to the choice of deflator (Nissim
and Ziv 2001). To examine whether our results are invariant to the choice of deflator, in columns
(4) – (6), we use three different deflators: the market value of equity five quarters before the
dividend declaration in column (4), the book value of common equity five quarters before the
dividend declaration in column (5), and the book value of common equity one quarter before the
dividend declaration in column (6). We continue to find the dividend change has a significant
effect on earnings changes in the year following the dividend declaration in all three specifications.
10
The past earnings level (earnings change) is the sum of the four quarterly earnings levels (earnings changes) before
the dividend announcement. Specifically, we include a total of six variables, three each for the earnings change and
level: (i) an interaction between the variable and an indicator equal to one if the variable is negative, (ii) an interaction
between a positive indicator and the variable squared, and (iii) an interaction between a negative indicator and the
variable squared. We exclude the main effect because it will be multi-colinear with our four quarterly earnings change
and levels variables. We find our coefficient estimates and significance levels are unchanged by including non-linear
controls for each quarterly change and level.
17
In columns (7) – (10), we examine the horizon over which dividend changes correlate with
earnings changes, by regressing future quarterly changes in earnings on the percentage dividend
change. In each column, the dependent variable is earnings from a post-dividend declaration
quarter minus earnings from the same quarter in the prior fiscal year, scaled by the market value
of equity the quarter before the dividend declaration. In column (7), we examine the association
between the dividend change and the earnings change one quarter ahead (E(q+1)). We find a
statistically significant coefficient on ΔDIV (β=0.008; t=4.6) that is approximately 33% of the
coefficient when the dependent variable is the annual earnings change. In columns (8), (9), and
(10) we examine the association between the dividend change and the earnings change two, three,
and four quarters ahead, respectively. The coefficient remains significant at all horizons, but
decreases monotonically with horizon: β=0.006 at two quarters ahead, β=0.004 at three quarters
ahead, and β=0.003 at four quarters ahead. Our finding of a significant, positive association
between dividend changes and unexpected earnings at horizons of three and four quarters contrasts
with Aharony and Dotan (1994), who do not control for expected earnings changes and find
negative or insignificant information content at these longer horizons.
4.2.
Comparison with prior literature
The prior literature has typically computed earnings changes over fiscal years, which can
result in earnings that occur after the dividend declaration but before the fiscal year end being
included in the prior year’s earnings (i.e., the year of the dividend change). In other words, in
some cases, earnings that are announced well after the dividend change are not considered future
earnings. To examine whether the disagreement between our findings and those of the prior
literature are attributable to computing earnings changes over the fiscal year, in Table 3, we
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calculate earnings changes as in the prior literature – earnings in the fiscal year after the dividend
declaration less earnings in the fiscal year of the dividend declaration.
In column (1), we regress the fiscal year earnings change (E(fy+1)) on the dividend change.
We find a marginally significant and negative coefficient on the dividend change (β=-0.009;
t=-1.9), suggesting dividends have no or negative information content when computing earnings
changes over fiscal years. In column (2), we add non-linear controls for past earnings changes and
levels (Fama and French 2000; Grullon et al. 2005), which much of the prior literature has used in
its estimation of information content. We find an insignificant, although positive coefficient on
the dividend change (β=0.003; t=0.9). In column (3), we add the return controls and find a
coefficient estimate of zero. In column (4), we include the earnings level and change for the past
four quarters and find the coefficient on the dividend change remains insignificant. Overall, these
results are consistent with the conclusions of the prior literature that when computing earnings
changes over fiscal years, dividend changes appear to have minimal or no information content.
4.3.
Information content of dividends beyond the subsequent year
The results in columns (7) – (10) of Table 2 appear to suggest the information content of
dividends declines with horizon. This result is somewhat puzzling given that dividend changes
tend to be persistent (Lintner 1956). We expect that if dividend changes represent a commitment
to change cash outflows for a multi-year period, cash inflows should also change over a similar
duration.
In Panel A of Table 4, we examine whether the relation between dividend changes and
future earnings changes extends beyond the four quarters after the dividend declaration. In column
19
(1), we examine the relation between the dividend change and the earnings change five to eight
quarters ahead. We compute the earnings change taking the difference between the sum of the
earnings announced five to eight quarters after the dividend declaration less the sum of quarterly
earnings from the four quarters before the dividend declaration. We use pre-dividend declaration
control variables, so we do not control for any of the earnings changes realized in the first year
after the dividend change. As a result, the coefficient on ΔDIV allows us to examine the persistence
of the earnings changes associated with the dividend change. We find a positive and statistically
significant coefficient on the dividend change (β=0.013; t=2.6), suggesting dividends have
information content for earnings for at least two years. The magnitude is 54% of the magnitude
of the coefficient in column (3) of Table 2, suggesting some mean reversion in the earnings change.
In column (2), we specifically test for mean reversion by computing the dependent variable
as the difference between quarterly earnings recognized five to eight quarters after the dividend
change and the first four quarters announced after the dividend change. We find a significantly
negative coefficient estimate (β=-0.011; t=2.9), consistent with mean reversion in the earnings
changes associated with the dividend changes.
In columns (3) – (4), we conduct similar analyses, except that we take the difference
between the sum of earnings announced nine through twelve quarters after the dividend change
and earnings announced the four quarters before the dividend change. Our test of information
content at the three-year horizon allows us to test whether the information content of dividends
diminishes further as the horizon extends. We continue to find significant information content,
and the coefficient estimate is actually greater than the coefficient estimate in column (1). In
column (4), we take the difference between earnings announced nine through twelve quarters after
the dividend declaration and earnings announced five through eight quarters after the dividend
20
declaration. Unlike in column (2), we find no economically or statistically significant mean
reversion at the three-year horizon.
Overall, our results suggest that dividend changes have a positive association with future
earnings over a long horizon, but the association mean reverts with most of the mean reversion
occurring shortly after the dividend declaration. The strong association with earnings changes
shortly after the dividend change can further explain why research designs which do not classify
all earnings changes after the dividend change as future earnings, find evidence inconsistent with
information content.
4.3.1. Information content of dividends for revenue and gross profit changes
One potential concern with our use of accounting income to measure changes in economic
income, is that accounting standards accelerate expenses into earnings and thus proxy for
economic income with error. Because the accelerated expenses often proxy for investment, it is
possible they are correlated with the dividend change.11 To address this concern, we test for
information content using revenues and gross profit (i.e., revenue minus cost of goods sold).
Because cost of goods sold are matched explicitly to the revenues they generate, gross profit should
be largely unaffected by inter-temporal variation in investment.12
To test for information content using revenue, we estimate equation (1) replacing all
earnings amounts in both dependent and independent variables with revenue amounts.
Specifically, we regress the change in revenue on the level and change in revenue over each of the
past four quarters while still controlling for past returns. We scale each of the revenue variables
11
Two well documented reasons why accounting income differs from economic income is: (i) the accounting system
requires immediate expensing of investments such as advertising and research and development, even though the firm
realizes the benefits of these expenses over a period of years (Luminita and Srivastava 2016), and (ii) the accounting
system requires assets to be written down when impaired (Basu 1997).
12
Novy-Marx (2013) states that “gross profits is the cleanest accounting measure of true economic profitability.”
21
by the market value of equity the quarter before the dividend declaration. In column (1) of Table
4 Panel B, we calculate the dependent variable as the sum of revenue for the four quarters after the
dividend declaration less the sum of revenue for the four quarters before the dividend declaration.
We find a statistically significant positive coefficient estimate on the dividend change (β=0.084,
t=2.7), consistent with dividend changes conveying information about future sales. In columns
(2)-(5), we break out the annual change into quarterly changes and find positive and statistically
significant coefficient estimates one quarter (β=0.016, t=2.7), two quarters (β=0.021, t=2.5), three
quarters (β=0.022, t=2.5), and four quarters (β=0.024, t=2.6) ahead. It is noteworthy that the
information content of revenues actually increases across the horizon.
In columns (6)-(10), we estimate equation (1) replacing all earnings variables with gross
profit variables. In column (6), when estimating information content at the annual horizon, we
find a statistically significant positive coefficient estimate on the dividend change (β=0.026, t=3.1).
In columns (7)-(10), we find positive and statistically significant coefficient estimates on the
dividend change one quarter (β=0.008, t=3.4), two quarters (β=0.007, t=2.9), three quarters
(β=0.006, t=2.8), and four quarters (β=0.006, t=2.6) ahead. Similar to our results for revenue, we
observe little attenuation in information content over the first year after the dividend change.
4.4
Information content of dividend decreases vs. increases
Our finding in section 4.1 that dividend changes have information content suggests that a
change in expected future cash flows can explain the positive association between dividend
changes and returns. Empirically, negative dividend changes have a larger effect on returns than
positive dividend changes. If variation in information content causes the association between
dividend changes and returns, we would expect dividend decreases to have more information
content about future earnings than dividend increases.
22
In Table 5, we examine whether the relation between future earnings and dividend changes
varies with the sign of the dividend change via a modified version of equation (1).
Eit+n = β0 + β1DIVit + β2DIVit*I[DIV<0] it + βjControls + ε
(2)
Where I[DIV<0] is an indicator variable equal to one if DIV is negative, zero otherwise.
We include both the level and change of the past four quarterly earnings changes and controls for
past returns in all models. In column (1), when using annual earnings changes as the dependent
variable, we find a significantly positive coefficient on both DIV (β=0.016; t=3.2) and the
interaction DIV*I[DIV<0] (β=0.047; t=5.3).
In columns (2)-(5), we examine how the information content of positive and negative
dividend changes varies with the horizon over which we compute earnings changes. Consistent
with the results in Table 2, the earnings information content of both dividend decreases and
increases decline with the horizon. However, the dividend decrease has an association with
earnings changes at least double that of dividend increases.
The dividend decrease has a
significantly larger association with earnings changes than increases for the first three quarters.
Overall, the results indicate that both positive and negative dividend changes have
associations with future earnings consistent with the sign of their announcement window returns.
Further, negative dividend changes have a larger impact on future earnings than positive changes,
consistent with the asymmetric reaction to dividend news.
4.5.
Matched sample analysis
The regression results presented thus far use a series of lagged earnings realizations and
return realizations to control for expected earnings changes. However, if the effect of past earnings
changes on future earnings changes varies with the size of the firm, its industry, and/or over time,
these interactions could lead us to find dividend changes predict earnings changes when the
23
predictability arises because of these heterogeneous effects. To address this possibility, in Table
6, we match dividend change firms to similar dividend paying firms that do not change their
dividend. Specifically, we estimate a propensity score model of the probability the firm will
change the dividend as a function of the past four quarterly dividend changes and levels.
I[DIV≠0] it = β0 + β1Eiq-1 + β2Eiq-2 + β3Eiq-3 + β4Eiq-4
+ β5Eiq-1 + β6Eiq-2 + β7Eiq-3 + β8Eiq-4 + ε
(3)
We estimate the model separately for dividend increases (I[DIV>0]) and decreases
(I[DIV<0]). We then match each dividend increase or decrease firm to a firm that did not change
the dividend. We choose the firm with the closest propensity score within the same dividend
declaration year and industry (two digit SIC). Matching is performed with replacement and we
impose a caliper distance of 0.01 (Shipman et al. 2016).
Panel A of Table 6 and Figure 2 report the level and change in earnings from four quarters
before, to four quarters after, the dividend declaration for dividend decrease firms and the matched
firms that did not change the dividend. Panel A demonstrates that both dividend decreasing firms
and matched non-changers exhibit declining performance in the four quarters prior to the dividend
declaration, though the differences between the dividend changers and non-changers are
insignificant.
However, the firms that decrease their dividend exhibit significantly worse
performance the quarter after the dividend declaration. The significantly worse performance
persists for each of the next four quarters, again illustrating persistent information content.
In Panel B of Table 6 and Figure 2, we repeat the analysis for firms that increase the
dividend. Opposite to Panel A, both the dividend increasing firms and the matched non-changers
exhibit improving performance via positive earnings changes in the four quarters before the
dividend declaration.
The differences in earnings changes during the pre-period are again
24
insignificant. In the four quarters after the dividend declaration, the dividend increase firms report
earnings changes that are significantly more positive than those reported by the matched nonchangers. Collectively, the results in Table 6 support the notion that dividend changes contain
information content about future earnings changes, and that our prior results are not driven by size,
industry, and/or time effects.
4.5.1 Do dividends convey information about future earnings changes or the persistence of past
earnings changes?
Our matching analysis reveals that firms that change their dividends have small earnings
changes over the quarters adjacent to the dividend change. Much of the information content of
dividend changes arises because dividend changes have a strong association with pre-dividend
declaration earnings changes and the earnings changes persist, whereas we would expect these
earnings changes to mean revert in the absence of a dividend change (Fama and French 2000).
Prior studies have provided evidence that dividends are associated with greater persistence of past
earnings changes (DeAngelo et al. 1992; DeAngelo et al. 1996; Koch and Sun 2004), and the
earnings changes we document around the dividend declaration are consistent with what we would
expect if dividends affect earnings via the persistence of past earnings changes.
To differentiate between dividends conveying information about future earnings changes
or the persistence of past earnings changes, we examine how controlling for the most recent
earnings change affects the information content of dividends. Specifically, we modify equation
(1) to include the interaction between the dividend change (DIV) and the change in the previous
quarter’s earnings (E(q-1)). If dividends only have information content because they are related
to the persistence of past earnings changes we would expect (i) a significant positive coefficient
on the interaction DIV*E(q-1), and (ii) substantial attenuation in the coefficient on the main effect
25
of the dividend change (DIV). In untabulated analysis, we estimate the identical model to column
(3), Table 2, except we include DIV*E(q-1). The coefficient on the main effect of DIV is
virtually unchanged and remains highly statistically significant (β=0.023; t=3.8) whereas the
interaction DIV*E(q-1) enters with an insignificant coefficient. Overall, our results suggest that
dividend changes have information content beyond simply reflecting the persistence of past
earnings changes.
4.6.
Dividend changes and analyst forecasts
We next use analyst forecasts of earnings as a benchmark for expected earnings. First, we
test whether analysts respond to dividend changes by examining forecast revisions around
dividend declarations. Second, we examine whether dividend changes predict forecast errors
before and after the dividend declaration.
4.6.1. Do analysts revise their forecasts in response to dividend changes?
To study analyst reactions to dividend changes, we regress the difference in analyst
estimates before and after the dividend declaration (REV) on the percentage dividend change
(ΔDIV). We also study if there is an asymmetry in the reaction to positive and negative news by
interacting the percentage dividend change with a dividend decrease indicator variable.
REVit+n = β0 + β1DIVit + βjControls + ε
(4a)
REVit+n = β0 + β1DIVit + β2DIVit*I[DIV<0] it + βjControls + ε
(4b)
We obtain analyst forecasts of earnings per share one, two, three, and four quarters ahead
from the I/B/E/S detail database. We require the initial analyst forecast be issued between the
most recent earnings announcement and two days before the dividend declaration, inclusive, to
ensure the initial forecast responds to the previous earnings announcement. We require the revised
forecast be issued between the dividend declaration and two days before the subsequent earnings
26
announcement, inclusive. The revision is the difference between the post-revision forecast and the
pre-revision forecast, scaled by price at the prior earnings announcement.13 If a firm has multiple
analysts who issue forecasts both before and after the dividend declaration, we take the difference
between the mean pre-period forecast and the mean post-period forecast. We winsorize revisions
at the top and bottom one percent.14 We control for prior returns as well as past forecast error to
control for the empirical fact that analysts respond slowly to stale information (Abarbanell 1991;
Abarbanell and Bernard 1992; Smith-Raedy et al. 2006).
We report the analyst revision results in Panel A of Table 7. In column (1), we estimate
equation (4a), requiring a revision for each of the four quarters following the dividend change
(REV(y+1)). We find a statistically significant positive coefficient on ΔDIV (β=0.465; t=2.4),
consistent with the hypothesis that analysts incorporate dividend change information into their
earnings forecasts. In column (2), we also interact ΔDIV with a negative dividend change indicator
variable as in equation (4b). The coefficient on the dividend change remains significantly positive
and the coefficient on the interaction is also significantly positive (β=1.129; t=2.6), suggesting
analysts respond more to dividend decreases than increases. This result is again consistent with
an asymmetry in the information content of positive and negative dividend changes.
In columns (3)-(6), we estimate equation (4a), but examine revisions over quarterly
windows (i.e., one, two, three, and four quarters ahead). All the coefficients on ΔDIV in columns
(3)-(6) are positive and statistically significant at the five percent threshold or greater. We find a
coefficient estimate of β=0.148 (t=3.3) in the quarter announced immediately following the
13
We drop firms with a share price below $3 to avoid outliers resulting from a small deflator.
Because we require (i) a gap between the dividend declaration and the prior earnings announcement for the analyst
to issue the pre-dividend forecast, and (ii) active analyst following, we report results for a subset of the dividend
declarations in Table 2. Another factor limiting our sample is the fact that the I/B/E/S detail file has much more
limited coverage of firms in the early part of our sample.
14
27
dividend declaration, β=0.106 (t=2.3) two quarters after the dividend declaration, β=0.090 (t=2.3)
three quarters ahead, and β=0.106 (t=3.0) four quarters ahead. Therefore, we observe persistent
information content and less attenuation with horizon relative to Table 2.
4.6.2. Do dividend changes predict forecast errors?
Next, we study whether dividend changes predict forecast errors around the dividend
declaration. We regress mean analyst forecast errors (FE) on the percentage dividend change
(ΔDIV), a post-dividend declaration indicator (Post) and an interaction between the dividend
change and a post-dividend declaration indicator variable. To examine the impact of the sign of
the dividend change on forecast errors, we also estimate a model that interacts ΔDIV and
ΔDIV*Post with an indicator variable that captures negative dividend changes (I[DIV<0]).
FEit+n = β0 + β1DIVit + β2DIVit*Postit + βjControls + ε
(5a)
FEit+n = β0 + β1DIVit + β2DIVit*Postit + β3DIVit*I[DIV<0] it
+ β4DIVit*I[DIV<0] it *Postit + βjControls + ε
(5b)
We impose the same sample selection criteria as in the analyst revision tests such that the
analyst must forecast earnings both before and after the dividend change. If a firm has multiple
analysts who issue forecasts both before and after the dividend declaration, we take the mean
forecast error in the pre- and post-periods. We winsorize all forecast errors at the top and bottom
one percent. We again control for prior returns as well as past forecast error.
We report the forecast error results in Panel B of Table 7. If dividend increases (decreases)
indicate that earnings will be higher (lower) than analysts previously expected, we predict a
positive coefficient on β1 in equation (5a). If analysts correct the forecast error predictability after
learning of the dividend declaration, we expect a negative coefficient on β 2 in equation (5a). In
column (1), we estimate equation (4a), requiring a mean forecast error for each of the four quarters
28
following the dividend declaration (FE(y+1)). We find a positive coefficient (β=0.699, t=1.8)
statistically significant at the ten percent threshold on ΔDIV, suggesting the dividend predicts error
in forecasts issued before the dividend declaration. We find a significantly negative coefficient on
the interaction ΔDIV*Post (β=-0.635, t=-2.8), consistent with the hypothesis that dividend changes
convey less information about future earnings after the analyst revises the forecast. Further, the
magnitude of the coefficient on ΔDIV*Post is nearly the same as that on ΔDIV, but with opposite
sign, and the F-test on the sum of the two coefficients is insignificantly different from zero
(untabulated). This suggests that analysts fully correct (on average) for their forecast error once
they learn of the dividend change.
In column (2), we estimate equation (5b), which interacts both coefficients of interest from
equation (5a) with a negative dividend change indicator variable. The coefficient on the dividend
change is significantly positive (β=0.550, t=2.1).
The coefficient on the interaction
ΔDIV*I[DIV<0] is more than twice the size of the main effect, suggesting negative dividend
changes have a larger association with forecast error. However, the coefficient is statistically
insignificant (β=1.098, t=0.9), so in this setting we are unable to reject the hypothesis positive and
negative dividend changes have equal information content. The coefficient on the interaction
ΔDIV*Post is significantly negative (β=-0.437, t=-3.6), consistent with the hypothesis that
dividend changes convey less information about future earnings after the analyst revises the
forecast. The coefficient on the interaction ΔDIV*I[DIV<0]*Post is also significantly negative
(β=-1.462, t=-2.2), suggesting the decline is even greater for dividend decreases.
In columns (3)-(6), we estimate model (5a), but examine earnings over quarterly horizons.
The coefficient on ΔDIV is positive and statistically significant at the ten percent level or greater
in three of the four columns (not three quarters ahead). The ΔDIV*Post interactions are all negative
29
and statistically significant at the five percent level or greater, consistent with the initial forecast
error predictability of dividends being corrected after the declaration (untabulated F-tests on the
sum of the two coefficients are insignificantly different from zero in all four columns). The results
also show some attenuation in the earnings predictability of dividend changes at longer horizons,
although the effect is more muted than in Table 2.
4.7.
Dividend declaration returns and future earnings
As another test of whether dividend declarations predict future earnings, we examine
whether returns around dividend declarations convey information about changes in earnings. The
decision to change the dividend will be affected by both previously disclosed and potentially
undisclosed information about future cash flows. While earnings realizations will be a function of
both types of information, if markets are reasonably efficient, market prices at the time of the
dividend declaration will already reflect the information released prior to that point. In this case,
the announcement return should only reflect previously undisclosed information and we can
regress future earnings on declaration date returns to test whether dividends convey information
about future earnings. Essentially, this regression approach attempts to remove the information
about expected earnings changes from the dividend change, by using announcement window
returns.
Theories that dividends convey information about discount rate news (Grullon et al. 2002),
or information about wealth transfers from debtholders to equityholders (Handjinicolaou and
Kalay 1984), would predict little or no relation between announcement returns and future
earnings.15 In contrast, if dividends convey information about future earnings, we would predict
a significantly positive relation. One challenge to this interpretation, however, is the empirical
15
Or perhaps even a negative relation in the case of the maturity hypothesis (Grullon et al. 2002).
30
evidence that returns lead earnings (Ball and Brown 1968). Thus, returns over any three-day
window are likely to convey some future earnings news. To test whether dividend changes convey
incremental information, we compare the information content of returns over the dividend
declaration window to two proxies for the (counter-factual) information content of returns in the
absence of a dividend change announcement: (i) announcement returns for dividend declarations
that do not change the dividend, and (ii) returns from three-day periods centered five trading days
before and after the dividend change. The second approach has the advantage of holding constant
the future earnings change, so we test whether dividends affect the time at which the market
impounds unexpected earnings. We also include earnings controls in all of our analyses, to remove
expected earnings changes from the dependent variable and increase the power of the tests.
Eit+n = β0 + β1Reti(-1,+1) + β2Reti(-1,+1)*I[DIV≠0]it + βjControls + ε
(6a)
Eit+n = β0 + β1Reti(-1,+1) + β2Reti(-6,-4) + β3Reti(+4,+6) + βjControls + ε
(6b)
We report the results from estimating equation (6a) in columns (1)-(5) of Table 8. Ret(-1,+1)
is the three-day return centered on the dividend declaration. We remove dividend declarations that
are bundled with earnings announcements by requiring that none of the days from the threetrading-day windows centered on the dividend declaration date coincide with any day of a threeday earnings announcement window. We interact the three-day return with an indicator variable
equal to one if the firm changes the dividend (I[DIV≠0]) to determine whether announcement
returns have more information content about future earnings when the firm changes the dividend.
In column (1), we measure earnings changes over the four quarters after the dividend declaration
minus the four quarters before the dividend declaration (E(y+1)).
The coefficient on the
announcement returns is significantly positive (β=0.084, t=7.5), suggesting dividend declaration
returns predict future earnings changes. We also find a significantly positive coefficient estimate
31
on the interaction Ret(-1,+1)*I[DIV≠0] (β=0.179, t=6.3), suggesting dividend declaration returns
have a stronger association with future earnings when the dividend is changed. The magnitude of
the sensitivity of earnings to returns for a dividend change is over three times that of a no-change
announcement.
In columns (2)-(5), we examine how the information content of returns varies with horizon,
by examining the association between returns and quarterly income changes for each of the four
quarters announced after the dividend declaration. We find significantly positive coefficients on
the interaction Ret(-1,+1)*I[DIV≠0]
for earnings one, two, three and four quarters ahead.
Economically, at each of the four quarters, announcement returns predict future earnings by at
least twice as much for declaration date returns that change the dividend, compared to declaration
date returns that do not change the dividend.
We report the results from estimating equation (6b) in columns (6)-(11) of Table 8. Ret(-6,4)
is the three-day return one week before the dividend declaration and Ret(+4,+6) is the three-day
return one week after the dividend declaration. We restrict the sample to dividend changes only
and compare the coefficient on the three-day declaration returns to the three-day returns one week
before and after the dividend declaration. To ensure our measurement of information content is
unaffected by the announcement of earnings, we require that none of the three-trading-day
windows coincide with any day of a three-day earnings announcement window. In column (6),
when examining the yearly income change over the following four quarters, we find a positive
statistically significant coefficient estimate on the declaration date returns (β=0.197, t=7.9). The
information content of announcement window returns is significantly larger and the magnitude is
more than double the information content of the return window five trading days before the
dividend declaration date (β=0.072, t=2.8). The information content of announcement returns is
32
also significantly greater and more than five times larger than the information content in returns
five trading days after the declaration (β=0.03, t=1.1).
Both counter-factual periods have
significantly less information content in returns than the window centered on the declaration date.16
In column (7), we estimate the same model on the sample of non-dividend changers to
evaluate whether dividend declarations that do not change the dividend provide information to the
market. The coefficient on each of the three return variables is positive and significant. However,
we note that (i) the coefficient on Ret(-1,+1) is less than half that of the coefficient in column (6),
and (ii) the coefficient on Ret(-1,+1) is slightly larger, but statistically indistinguishable from the
coefficients on returns during the two counter-factual windows. Overall, our tests suggest dividend
declarations which do not change the dividend do not have significant information content.
In columns (8)-(11), we examine how the information content of dividends varies with
horizon. Similar to the results described above, we find the information content of declaration
date returns exceeds the information content of returns both before and after the declaration date.
Seven of the eight differences are statistically significant. The only insignificant difference is
information content for returns before the declaration, for the four quarter ahead earnings horizon.
5.
Information asymmetry and the information content of dividends
If, as our previous tests suggest, dividends convey information about future earnings to
outside investors, this effect should be more pronounced in environments where there is more
information asymmetry. We examine this possibility by studying cross-sectional variation in the
16
One surprising feature of our results is that the information content of returns is higher before the dividend
declaration than after. Prior studies’ findings suggest the information content of returns increases monotonically with
the length of time until the next earnings announcement (Kaplan and Milian 2016). The larger coefficient on returns
before the declaration is thus atypical and suggests that the information disclosed through the dividend reduces
information content of subsequent returns, consistent with theory that disclosure substitutes for private information
production (Verrecchia 1982; Diamnond 1985).
33
information content of dividend changes. We first examine the relation between dividend changes
and future earnings and then turn to the market’s reaction to dividend changes.
5.1.
Dividend changes and future earnings
To study how information asymmetry affects the information content of dividends, we
estimate a modified version of equation (1). Specifically, we regress the change in earnings on the
dividend change, a proxy for information asymmetry, and the interaction of the proxy for
information asymmetry with the dividend change (our variable of interest). We continue to use all
return and earnings control variables in column (3) of Table 2.
Eit+n = β0 + β1DIVit + β2IAit + β3DIVit*IAit + βjControls + ε
(7)
We estimate equation (7) using eight proxies for information asymmetry (IA). In column
(1) of Table 9, we use the time between the dividend declaration and the earnings announcement
to proxy for information asymmetry. Because disclosure decreases the information gap between
managers and investors, we expect this gap to grow with the time since the last earnings
announcement. In this case, we expect declarations later in the quarter to convey more information.
We find a positive statistically significant coefficient estimate on the interaction ΔDIV*Late. This
finding is consistent with the hypothesis that dividend changes made when the manager knows
relatively more than investors convey more information.
In column (2), we use the average (absolute) percentage change in dividends (Frequency)
as a proxy for information asymmetry. If dividend changes convey managers’ private information,
we expect that frequently changing the dividend in the past will reduce information asymmetry,
leading subsequent dividend changes to convey less information. We find a negative statistically
significant coefficient estimate on the interaction ΔDIV*Frequency, consistent with the hypothesis
that infrequent dividend changes convey more information content about future earnings changes.
34
In columns (3)-(5), we use volatility of daily returns, cash flows, and analyst forecasts to
capture information asymmetry. When information is more volatile, investors extract less precise
signals from the information, leading managers to have a greater information advantage. Daily
return volatility is the standard deviation of daily returns over the year before the dividend
declaration, cash flow volatility is the standard deviation of cash flows over the five fiscal years
preceding the dividend declaration, and analyst forecast volatility is the standard deviation of
analyst forecasts issued in the quarter before the prior earnings announcement. We find positive
coefficients on all three variables and statistically significant coefficient estimates on two of the
three interactions: ΔDIV*SD(Returns) and ΔDIV*SD(Forecasts). These findings are consistent
with the hypothesis that when alternative channels conveying information are noisier, dividend
changes convey more information about future earnings changes.
In columns (6)-(8), we proxy for information uncertainty with the inverse of analyst
following (Coverage), the market value of equity (MVE), and firm age (Age). The inverse
transformation is used to ensure that higher numeric values proxy for higher levels of information
asymmetry. We find positive statistically significant coefficient estimates on the interactions
ΔDIV*1/Coverage and ΔDIV*1/MVE, consistent with information content varying with
information asymmetry. We find the interaction on ΔDIV*1/Age is insignificantly negative,
whereas the theory that information asymmetry enhances information content would predict a
positive coefficient. Overall, these results are consistent with the hypothesis that dividend changes
convey more information content in the context of a weaker information environment.
5.2.
Market reaction to dividend changes
As an additional test of the extent to which the information environment affects the
information content of dividend announcements, we study how the market reaction to dividend
35
changes varies with proxies for information asymmetry. We regress the three-day dividend
announcement return on ΔDIV, a proxy for information asymmetry, and the interaction between
the information asymmetry proxy and ΔDIV (our variable of interest).
Reti(-1,+1) = β0 + β1DIVit + β2IAit + β3DIVit*IAit + βjControls + ε
(8)
If information asymmetry increases the amount of information the market extracts from
dividend declarations, we expect a positive coefficient on the interaction between the information
asymmetry proxies and ΔDIV. We use the same eight measures of information asymmetry from
Table 9 and the respective interactions with ΔDIV to explore the association with announcement
returns.
We require that none of the three-trading-day windows centered on the dividend
declaration date coincide with any day of a three-day earnings announcement window, as the
returns on these days are likely to be contaminated by other earnings-related news.
Results from estimating equation (8) are presented in Table 10. Overall, while slightly
weaker statistically, the results are consistent with those in Table 9. For each of the eight
information asymmetry proxies, we find that when information asymmetry is greater, there is a
stronger relation between the size of the dividend change and the announcement window return.
In five of the eight cases, these coefficient estimates are statistically significant. These results
demonstrate that dividend changes have more predictability for future earnings when there is more
information asymmetry (Table 9) and suggest that investors take this increased predictability into
account when reacting to dividend changes (Table 10).
6.
Conclusion
In this paper, we provide robust evidence that dividend changes contain information
content about future earnings. First, we show dividend changes are correlated with future earnings
36
changes after controlling for past earnings and returns. Second, we show dividend changes are
correlated with pre-dividend declaration forecast errors, but analysts revise their forecasts in
response to dividend changes in a manner that fully reverses the previous forecast error. Third,
we show dividend announcements successfully convey earnings information to investors. Market
reactions to dividend changes are positively related to future earnings changes, and substantially
more so than are returns on days when dividends are not changed.
We examine the horizon of earnings predictability, and find that dividend changes predict
earnings changes beyond the subsequent year.
This long-horizon earnings predictability is
consistent with survey evidence that managers are reluctant to change dividends except in response
to “permanent” earnings changes (Lintner 1956; Brav et al. 2005). However, it is a novel empirical
finding in the literature.
Our findings on the information content of dividends relate to explanations for the positive
correlation between dividend changes and announcement window returns. Our evidence provides
support for the theory that investors are reacting to news about future cash flows. Two crosssectional analyses provide further support for this explanation. First, dividend decreases have
more information content and larger market reactions than dividend increases. Second, the
relations between dividend changes and both future earnings as well as declaration returns are
stronger when information asymmetry is high. These results are consistent with the predictions of
signaling models, where managers pay dividends in order to convey information. However, we
caution our study does not allow us to distinguish between whether dividends simply convey
information or are intentionally used by managers as a costly “signal” in a strict sense.
We measure earnings changes differencing earnings realized after the dividend declaration
from earnings realized before the dividend declaration. Our approach differs from prior studies
37
that compute changes in dividends and earnings over fiscal years. This approach can lead earnings
realized after the dividend declaration to be considered current (i.e., pre-dividend) earnings,
whereas such earnings should be classified as future earnings. We show our results are attributable
to this measurement innovation. We argue future studies investigating the information content of
dividends should follow the “event window” approach. Because earnings changes mean revert, if
an event has information content, that information content will be strongest in the short window
after the event. Thus, mean reversion of earnings requires careful delineation of earnings before
and after an event to establish or refute that the event has information content about future earnings.
38
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43
Appendix A: Variable Definitions
Dividend Variables
Name
ΔDIV
I[ΔDIV≠0]
I[ΔDIV<0]
I[ΔDIV>0]
Definition
Current quarterly dividend less the prior quarterly dividend divided by the prior quarterly
dividend.
Indicator variable equal to one if ΔDIV is non-zero (less than -0.1% or greater than +0.1%),
zero otherwise.
Indicator variable equal to one if ΔDIV is negative (less than -0.1%), zero otherwise.
Indicator variable equal to one if ΔDIV is positive (greater than +0.1%), zero otherwise.
Earnings and Return Variables
Name
Definition
E(q+n)
Earnings before extraordinary items (IBQ) announced n quarters after the dividend declaration
and scaled by the market value of equity one quarter before the dividend declaration. Refer to
Figure 1 for a timeline of the earnings calculations relative to the dividend declaration.
E(q-n)
Earnings before extraordinary items (IBQ) announced n quarters before the dividend
declaration and scaled by the market value of equity one quarter before the dividend
declaration. Refer to Figure 1 for a timeline of the earnings calculations relative to the
dividend declaration.
E(y+1)
E(q+1) + E(q+2) + E(q+3) + E(q+4)
E(y-1)
E(q-4) + E(q-3) + E(q-2) + E(q-1)
ΔE(q+n)
ΔE(y+n)
Earnings before extraordinary items (IBQ) announced n quarters after the dividend declaration
less earnings before extraordinary items for the same quarter in the prior year and scaled by
the market value of equity one quarter before the dividend declaration. Refer to Figure 1 for a
timeline of the earnings calculations relative to the dividend declaration.
Earnings before extraordinary items (IBQ) announced n quarters before the dividend
declaration less earnings before extraordinary items for the same quarter in the prior year and
scaled by the market value of equity one quarter before the dividend declaration. Refer to
Figure 1 for a timeline of the earnings calculations relative to the dividend declaration.
ΔE(q+1) + ΔE(q+2) + ΔE(q+3) + ΔE(q+4)
ΔE(y-n)
ΔE(q-4) + ΔE(q-3) + ΔE(q-2) + ΔE(q-1)
Rev
Revenue (SALEQ) scaled by the market value of equity. The naming convention for the
timing of the variable follows that of the earnings variables above.
Gross profit equals revenue (SALEQ) less cost of goods sold (COGSQ) scaled by the market
value of equity. The naming convention for the timing of the variable follows that of the
earnings variables above.
Earnings before extraordinary items (IB) in the fiscal year of the dividend declaration scaled
by the market value of equity the year before the dividend declaration.
Earnings before extraordinary items (IB) in the fiscal year after the dividend declaration less
earnings before extraordinary items in the year of the dividend declaration and scaled by the
market value of equity the year before the dividend declaration.
Earnings before extraordinary items (IB) in the fiscal year of the dividend declaration less
earnings before extraordinary items in the year before the dividend declaration and scaled by
the market value of equity the year before the dividend declaration.
ΔE(q-n)
GP
E(fy0)
ΔE(fy+1)
ΔE(fy0)
44
E(fqn)
ΔE(fqn)
Ret(-j,+k)
Earnings before extraordinary items (IBQ) in quarter n of the fiscal year of the dividend
declaration scaled by the market value of equity the year before the dividend declaration.
Earnings before extraordinary items (IBQ) in quarter n of the fiscal year of the dividend
declaration less earnings before extraordinary items in the same quarter of the year before the
dividend declaration and scaled by the market value of equity the year before the dividend
declaration.
Daily compounded returns from j trading days before the dividend declaration to k trading
days after the dividend declaration less the daily compounded return to the value-weighted
market portfolio over the same period.
Analyst Forecast Variables
Name
Definition
REV(q+n)
Analyst revisions to earnings per share forecasts n quarters ahead. The revision is the EPS
forecast issued between the dividend declaration and the subsequent earnings announcement
less the EPS forecast issued between the prior earnings announcement and the dividend
declaration, scaled by price at the prior earnings announcement and multiplied by 100. We
only retain analysts who forecast EPS n quarters ahead both before and after the dividend
declaration. If a firm has multiple analysts who issue forecasts both before and after the
dividend declaration, we take the difference between the mean pre-period forecast and the
mean post-period forecast.
REV(y+1)
REV(q+1) + REV(q+2) + REV(q+3) + REV(q+4)
FE(q+n)
FE(y+1)
Analyst forecast errors for earnings per share forecasts n quarters ahead. The forecast error is
the EPS forecast issued between the prior earnings announcement and the subsequent earnings
announcement less the actual EPS figure, scaled by price at the prior earnings announcement
and multiplied by 100. We only retain analysts who forecast EPS n quarters ahead before and
after the dividend declaration. If a firm has multiple analysts who issue forecasts both before
and after the dividend declaration, we take the mean pre-period forecast and the mean postperiod forecast.
FE(q+1) + FE(q+2) + FE(q+3) + FE(q+4)
Information Asymmetry Variables
Name
Definition
Late
Indicator variable equal to one if the dividend declaration occurs closer to the subsequent
earnings announcement than the prior earnings announcement, zero otherwise.
Frequency
Average percentage change of all of the firm's prior dividend declarations.
SD(Returns)
Standard deviation of daily returns over the year before the dividend declaration.
SD(CashFlows)
Standard deviation of cash flows over the five fiscal years preceding the dividend declaration.
SD(Forecasts)
Standard deviation of forecasts issued in the quarter before the prior earnings announcement.
Coverage
Number of analysts covering the firm.
MVE
Market value of equity one quarter before the dividend declaration.
Age
Number of years since the firm's CRSP coverage began.
45
Figure 1: Timeline
EA(q-8)
EA(q-7)
EA(q-6)
EA(q-5)
EA(q-4)
EA(q-3)
EA(q-2)
EA(q-1) EA(q+1)
DIV
EA(q+2)
EA(q+3)
EA(q+4)
This figure reports a timeline to depict the sample and variable construction. All dividend declarations in the sample occur
between two consecutive earnings announcements. We refer to the lower (upper) bound earnings announcement quarter
as quarter q-1 (q+1). If the dividend declaration falls on an earnings announcement date we consider that earnings
announcement as quarter q-1. All quarterly earnings definitions follow accordingly. For example, E(q+1) refers to earnings
announced at EA(q+1) and E(q-1) refers to earnings announced at EA(q-1). All quarterly earnings changes are seasonal
changes. For example, ΔE(q+1) refers to earnings announced at EA(q+1) less earnings announced at EA(q-4) and ΔE(q-1) refers
to earnings announced at EA(q-1) less earnings announced at EA(q-5). All annual earnings calculations sum four consecutive
quarterly earnings figures. For example, E(y+1) is the sum of the four quarterly earnings figures announced at EA(q+1)
through EA(q+4) and E(y-1) is the sum of the four quarterly earnings figures announced at EA(q-4) through EA(q-1). All annual
earnings change calculations sum four consecutive quarterly earnings figures less the sum of the prior four consecutive
quarterly earnings figures. For example, ΔE(y+1) is the sum of the four quarterly earnings figures announced at EA(q+1)
through EA(q+4) less the sum of the four quarterly earnings figures announced at EA(q-4) through EA(q-1).
46
Appendix A: Variable Definitions
Dividend Variables
Name
ΔDIV
I[ΔDIV≠0]
I[ΔDIV<0]
I[ΔDIV>0]
Definition
Current quarterly dividend less the prior quarterly dividend divided by the prior quarterly
dividend.
Indicator variable equal to one if ΔDIV is non-zero (less than -0.1% or greater than +0.1%),
zero otherwise.
Indicator variable equal to one if ΔDIV is negative (less than -0.1%), zero otherwise.
Indicator variable equal to one if ΔDIV is positive (greater than +0.1%), zero otherwise.
Earnings and Return Variables
Name
Definition
E(q+n)
Earnings before extraordinary items (IBQ) announced n quarters after the dividend declaration
and scaled by the market value of equity one quarter before the dividend declaration. Refer to
Figure 1 for a timeline of the earnings calculations relative to the dividend declaration.
E(q-n)
Earnings before extraordinary items (IBQ) announced n quarters before the dividend
declaration and scaled by the market value of equity one quarter before the dividend
declaration. Refer to Figure 1 for a timeline of the earnings calculations relative to the
dividend declaration.
E(y+1)
E(q+1) + E(q+2) + E(q+3) + E(q+4)
E(y-1)
E(q-4) + E(q-3) + E(q-2) + E(q-1)
ΔE(q+n)
ΔE(y+n)
Earnings before extraordinary items (IBQ) announced n quarters after the dividend declaration
less earnings before extraordinary items for the same quarter in the prior year and scaled by
the market value of equity one quarter before the dividend declaration. Refer to Figure 1 for a
timeline of the earnings calculations relative to the dividend declaration.
Earnings before extraordinary items (IBQ) announced n quarters before the dividend
declaration less earnings before extraordinary items for the same quarter in the prior year and
scaled by the market value of equity one quarter before the dividend declaration. Refer to
Figure 1 for a timeline of the earnings calculations relative to the dividend declaration.
ΔE(q+1) + ΔE(q+2) + ΔE(q+3) + ΔE(q+4)
ΔE(y-n)
ΔE(q-4) + ΔE(q-3) + ΔE(q-2) + ΔE(q-1)
Rev
Revenue (SALEQ) scaled by the market value of equity. The naming convention for the
timing of the variable follows that of the earnings variables above.
Gross profit equals revenue (SALEQ) less cost of goods sold (COGSQ) scaled by the market
value of equity. The naming convention for the timing of the variable follows that of the
earnings variables above.
Earnings before extraordinary items (IB) in the fiscal year of the dividend declaration scaled
by the market value of equity the year before the dividend declaration.
Earnings before extraordinary items (IB) in the fiscal year after the dividend declaration less
earnings before extraordinary items in the year of the dividend declaration and scaled by the
market value of equity the year before the dividend declaration.
Earnings before extraordinary items (IB) in the fiscal year of the dividend declaration less
earnings before extraordinary items in the year before the dividend declaration and scaled by
the market value of equity the year before the dividend declaration.
ΔE(q-n)
GP
E(fy0)
ΔE(fy+1)
ΔE(fy0)
47
E(fqn)
ΔE(fqn)
Ret(-j,+k)
Earnings before extraordinary items (IBQ) in quarter n of the fiscal year of the dividend
declaration scaled by the market value of equity the year before the dividend declaration.
Earnings before extraordinary items (IBQ) in quarter n of the fiscal year of the dividend
declaration less earnings before extraordinary items in the same quarter of the year before the
dividend declaration and scaled by the market value of equity the year before the dividend
declaration.
Daily compounded returns from j trading days before the dividend declaration to k trading
days after the dividend declaration less the daily compounded return to the value-weighted
market portfolio over the same period.
Analyst Forecast Variables
Name
Definition
REV(q+n)
Analyst revisions to earnings per share forecasts n quarters ahead. The revision is the EPS
forecast issued between the dividend declaration and the subsequent earnings announcement
less the EPS forecast issued between the prior earnings announcement and the dividend
declaration, scaled by price at the prior earnings announcement and multiplied by 100. We
only retain analysts who forecast EPS n quarters ahead both before and after the dividend
declaration. If a firm has multiple analysts who issue forecasts both before and after the
dividend declaration, we take the difference between the mean pre-period forecast and the
mean post-period forecast.
REV(y+1)
REV(q+1) + REV(q+2) + REV(q+3) + REV(q+4)
FE(q+n)
FE(y+1)
Analyst forecast errors for earnings per share forecasts n quarters ahead. The forecast error is
the EPS forecast issued between the prior earnings announcement and the subsequent earnings
announcement less the actual EPS figure, scaled by price at the prior earnings announcement
and multiplied by 100. We only retain analysts who forecast EPS n quarters ahead before and
after the dividend declaration. If a firm has multiple analysts who issue forecasts both before
and after the dividend declaration, we take the mean pre-period forecast and the mean postperiod forecast.
FE(q+1) + FE(q+2) + FE(q+3) + FE(q+4)
Information Asymmetry Variables
Name
Definition
Late
Indicator variable equal to one if the dividend declaration occurs closer to the subsequent
earnings announcement than the prior earnings announcement, zero otherwise.
Frequency
Average percentage change of all of the firm's prior dividend declarations.
SD(Returns)
Standard deviation of daily returns over the year before the dividend declaration.
SD(CashFlows)
Standard deviation of cash flows over the five fiscal years preceding the dividend declaration.
SD(Forecasts)
Standard deviation of forecasts issued in the quarter before the prior earnings announcement.
Coverage
Number of analysts covering the firm.
MVE
Market value of equity one quarter before the dividend declaration.
Age
Number of years since the firm's CRSP coverage began.
48
Figure 1: Timeline
EA(q-8)
EA(q-7)
EA(q-6)
EA(q-5)
EA(q-4)
EA(q-3)
EA(q-2)
EA(q-1) EA(q+1)
DIV
EA(q+2)
EA(q+3)
EA(q+4)
This figure reports a timeline to depict the sample and variable construction. All dividend declarations in the sample occur
between two consecutive earnings announcements. We refer to the lower (upper) bound earnings announcement quarter
as quarter q-1 (q+1). If the dividend declaration falls on an earnings announcement date we consider that earnings
announcement as quarter q-1. All quarterly earnings definitions follow accordingly. For example, E(q+1) refers to earnings
announced at EA(q+1) and E(q-1) refers to earnings announced at EA(q-1). All quarterly earnings changes are seasonal
changes. For example, ΔE(q+1) refers to earnings announced at EA(q+1) less earnings announced at EA(q-4) and ΔE(q-1) refers
to earnings announced at EA(q-1) less earnings announced at EA(q-5). All annual earnings calculations sum four consecutive
quarterly earnings figures. For example, E(y+1) is the sum of the four quarterly earnings figures announced at EA(q+1)
through EA(q+4) and E(y-1) is the sum of the four quarterly earnings figures announced at EA(q-4) through EA(q-1). All annual
earnings change calculations sum four consecutive quarterly earnings figures less the sum of the prior four consecutive
quarterly earnings figures. For example, ΔE(y+1) is the sum of the four quarterly earnings figures announced at EA(q+1)
through EA(q+4) less the sum of the four quarterly earnings figures announced at EA(q-4) through EA(q-1).
49
Figure 2: Relation Between Dividend Changes and Future Earnings - Matching Analysis
Panel A: Dividend Decreases
Panel B: Dividend Increases
This figure reports the matching analysis results. In Panel A (B) each dividend decrease (increase)
observation is matched to a firm in the same industry and quarter with no dividend change. Observations
are matched via the level and change in earnings over quarters q-4 to q-1. Both Panels report graphs that
illustrate the earnings levels (E) over quarters q-4 to q+12 and the earnings changes (ΔE) over quarters q-4
to q+4, relative to the same quarter in the previous fiscal year. Appendix A reports variable definitions.
Figure 1 depicts the timeline for quarter and year designations.
50
Variable
ΔDIV
I[ΔDIV≠0]
I[ΔDIV<0]
I[ΔDIV>0]
N
99,350
99,350
99,350
99,350
Variable
ΔDIV
ΔE(y+1)
ΔE(y-1)
ΔE(q+4)
ΔE(q+3)
ΔE(q+2)
ΔE(q+1)
ΔE(q-1)
ΔE(q-2)
ΔE(q-3)
ΔE(q-4)
Ret(-1,+1)
Ret(-2,-20)
Ret(-21,-40)
Ret(-41,-60)
Ret(-61,-120)
Ret(-121,-240)
N
84,427
84,427
84,427
84,427
84,427
84,427
84,427
84,427
84,427
84,427
84,427
84,427
84,427
84,427
84,427
84,427
84,427
Table 1: Descriptive Statistics
Panel A: All Observations
Mean
StdDev
P25
0.022
0.136
0.000
0.150
0.357
0.000
0.010
0.102
0.000
0.140
0.347
0.000
Panel B: ΔDIV=0
Mean
StdDev
0.000
0.000
0.001
0.074
0.000
0.063
0.001
0.025
0.001
0.025
0.000
0.024
0.000
0.024
0.000
0.021
0.000
0.021
0.000
0.020
0.000
0.021
0.001
0.036
-0.002
0.083
0.000
0.081
0.003
0.080
0.001
0.140
0.007
0.205
51
P25
0.000
-0.016
-0.014
-0.005
-0.005
-0.005
-0.005
-0.005
-0.004
-0.004
-0.004
-0.018
-0.052
-0.049
-0.045
-0.087
-0.124
Median
0.000
0.000
0.000
0.000
P75
0.000
0.000
0.000
0.000
Median
0.000
0.006
0.006
0.002
0.002
0.002
0.002
0.002
0.002
0.002
0.002
0.000
-0.005
-0.004
-0.001
-0.006
-0.010
P75
0.000
0.025
0.021
0.008
0.007
0.007
0.007
0.006
0.006
0.006
0.006
0.018
0.043
0.044
0.047
0.078
0.112
Variable
ΔDIV
ΔE(y+1)
ΔE(y-1)
ΔE(q+4)
ΔE(q+3)
ΔE(q+2)
ΔE(q+1)
ΔE(q-1)
ΔE(q-2)
ΔE(q-3)
ΔE(q-4)
Ret(-1,+1)
Ret(-2,-20)
Ret(-21,-40)
Ret(-41,-60)
Ret(-61,-120)
Ret(-121,-240)
N
1,036
1,036
1,036
1,036
1,036
1,036
1,036
1,036
1,036
1,036
1,036
1,036
1,036
1,036
1,036
1,036
1,036
Panel C: ΔDIV<0
Mean
StdDev
-0.498
0.237
-0.031
0.126
-0.054
0.108
0.006
0.041
-0.003
0.040
-0.012
0.040
-0.020
0.044
-0.019
0.039
-0.014
0.035
-0.010
0.032
-0.007
0.031
-0.026
0.055
-0.024
0.099
-0.020
0.096
-0.008
0.101
-0.042
0.160
-0.044
0.216
P25
-0.667
-0.086
-0.112
-0.009
-0.016
-0.027
-0.040
-0.034
-0.026
-0.021
-0.019
-0.072
-0.085
-0.082
-0.069
-0.150
-0.192
Median
-0.500
-0.009
-0.029
0.002
0.000
-0.004
-0.009
-0.009
-0.006
-0.004
-0.002
-0.020
-0.027
-0.025
-0.009
-0.054
-0.063
P75
-0.333
0.024
0.009
0.019
0.010
0.006
0.004
0.003
0.004
0.005
0.006
0.006
0.032
0.034
0.054
0.049
0.073
Panel D: ΔDIV>0
Variable
N
Mean
StdDev
P25
Median
P75
ΔDIV
13,887
0.196
0.275
0.071
0.125
0.200
ΔE(y+1)
13,887
0.011
0.049
-0.003
0.008
0.024
ΔE(y-1)
13,887
0.015
0.042
0.001
0.010
0.025
ΔE(q+4)
13,887
0.001
0.018
-0.003
0.002
0.006
ΔE(q+3)
13,887
0.002
0.017
-0.002
0.002
0.006
ΔE(q+2)
13,887
0.003
0.016
-0.001
0.002
0.007
ΔE(q+1)
13,887
0.004
0.016
0.000
0.002
0.007
ΔE(q-1)
13,887
0.005
0.015
0.000
0.003
0.008
ΔE(q-2)
13,887
0.004
0.015
0.000
0.002
0.007
ΔE(q-3)
13,887
0.003
0.014
0.000
0.002
0.006
ΔE(q-4)
13,887
0.003
0.015
0.000
0.002
0.006
Ret(-1,+1)
13,887
0.008
0.035
-0.011
0.006
0.025
Ret(-2,-20)
13,887
0.006
0.075
-0.039
0.002
0.046
Ret(-21,-40)
13,887
0.004
0.074
-0.040
0.001
0.044
Ret(-41,-60)
13,887
0.007
0.073
-0.037
0.003
0.046
Ret(-61,-120)
13,887
0.014
0.126
-0.065
0.004
0.081
Ret(-121,-240)
13,887
0.038
0.193
-0.084
0.017
0.133
This table reports descriptive statistics. N is the number of observations, StdDev is the standard deviation, P25
(P75) is the 25th (75th) percentile of the variable's distribution. Panel A reports all observations, Panel B
reports observations without a dividend change, Panel C reports observations with a decrease in the dividend,
and Panel D reports observations with an increase in the dividend. Appendix A reports variable definitions.
Figure 1 depicts the timeline for quarter and year designations.
52
ΔDIV
(1)
ΔE(y+1)
0.028***
(4.151)
E(q-1)
E(q-2)
E(q-3)
E(q-4)
ΔE(q-1)
ΔE(q-2)
ΔE(q-3)
ΔE(q-4)
Ret(-2,-20)
Ret(-21,-40)
Ret(-41,-60)
Ret(-61,-120)
Ret(-121,-240)
Intercept
0.001
(0.768)
Table 2: Relation Between Dividend Changes and Future Earnings Changes
(2)
(3)
(4)
(5)
(6)
(7)
(8)
ΔE(y+1)
ΔE(y+1)
ΔE(y+1)
ΔE(y+1)
ΔE(y+1)
ΔE(q+1)
ΔE(q+2)
0.029***
0.024***
0.023***
0.028***
0.025***
0.008***
0.006***
(4.325)
(4.055)
(4.133)
(4.355)
(4.366)
(4.603)
(3.904)
0.217***
0.502***
0.385***
0.414***
0.423***
0.217***
0.097***
(5.134)
(13.170)
(10.839)
(12.397)
(12.293)
(20.780)
(6.325)
-0.225***
0.144***
0.052
0.144***
0.147***
0.023**
0.087***
(-4.777)
(3.465)
(1.270)
(3.572)
(3.422)
(2.074)
(9.458)
-0.270***
0.080**
0.003
0.116***
0.152***
0.094***
-0.244***
(-6.442)
(2.074)
(0.070)
(3.683)
(3.876)
(8.715)
(-8.683)
-0.434***
-0.031
-0.120**
0.063
0.089*
-0.292***
0.016
(-8.579)
(-0.800)
(-2.555)
(1.374)
(1.944)
(-11.847)
(1.474)
0.276***
0.457***
0.422***
0.353***
0.326***
0.220***
0.205***
(4.742)
(7.820)
(8.522)
(10.118)
(10.222)
(11.255)
(11.655)
-0.124**
0.138**
0.121***
0.068**
0.096***
0.138***
0.074***
(-2.470)
(2.666)
(2.956)
(2.120)
(2.703)
(10.573)
(5.294)
-0.241***
0.067
0.039
-0.010
-0.031
0.059***
-0.260***
(-5.270)
(1.411)
(0.787)
(-0.277)
(-0.813)
(4.828)
(-13.182)
-0.259***
0.077
0.003
-0.073
-0.083
-0.213***
0.079***
(-5.769)
(1.507)
(0.052)
(-1.440)
(-1.622)
(-14.748)
(5.543)
0.088***
0.092***
0.128***
0.115***
0.017***
0.024***
(11.832)
(12.402)
(13.583)
(13.093)
(9.091)
(12.831)
0.085***
0.087***
0.127***
0.116***
0.016***
0.023***
(11.855)
(12.074)
(11.955)
(11.677)
(8.670)
(11.032)
0.083***
0.087***
0.126***
0.117***
0.018***
0.020***
(13.180)
(12.478)
(12.164)
(11.914)
(11.940)
(12.289)
0.063***
0.070***
0.100***
0.089***
0.015***
0.015***
(11.308)
(11.481)
(12.647)
(12.920)
(11.776)
(10.129)
0.029***
0.037***
0.051***
0.045***
0.006***
0.006***
(6.659)
(7.344)
(8.475)
(7.735)
(6.838)
(6.153)
0.016***
-0.007***
-0.005*
-0.020***
-0.018***
-0.000
0.001**
(6.442)
(-3.110)
(-1.741)
(-4.759)
(-4.691)
(-0.025)
(2.095)
(9)
ΔE(q+3)
0.004***
(3.466)
0.174***
(17.155)
-0.238***
(-8.815)
0.055***
(5.023)
-0.012
(-0.922)
0.114***
(6.226)
-0.274***
(-11.885)
0.050***
(3.509)
0.063***
(5.011)
0.022***
(10.328)
0.021***
(10.344)
0.021***
(9.616)
0.015***
(9.117)
0.006***
(5.569)
0.001**
(2.458)
(10)
ΔE(q+4)
0.003***
(2.952)
-0.188***
(-6.545)
0.076***
(5.340)
-0.026
(-1.641)
0.075***
(5.700)
-0.237***
(-12.290)
0.027**
(2.043)
0.062***
(4.479)
-0.002
(-0.128)
0.020***
(9.103)
0.021***
(10.236)
0.019***
(10.157)
0.014***
(8.789)
0.007***
(6.054)
0.002**
(2.656)
Non-Linear
Controls
Excluded
Excluded
Included
Included
Included
Included
Included
Included
Included
Included
Deflator
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-5)
CE(q-5)
CE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
99,350
99,350
99,350
98,209
97,011
98,174
99,350
99,350
99,350
99,350
Observations
R-squared
0.003
0.088
0.191
0.188
0.153
0.172
0.341
0.248
0.193
0.136
This table reports OLS regression results. The dependent variable is the earnings change for the time period denoted in the column header scaled by a lagged deflator
denoted in the column footer. The primary variable of interest is the percentage dividend change (ΔDIV). Standard errors are clustered by year of the dividend
declaration. T-statistics are reported in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels for two-tailed tests, respectively.
Appendix A reports variable definitions. Figure 1 depicts the timeline for quarter and year designations.
53
Table 3: Relation Between Dividend Changes and Future Earnings Changes - Fiscal Year Approach
(1)
(2)
(3)
(4)
ΔE(fy+1)
ΔE(fy+1)
ΔE(fy+1)
ΔE(fy+1)
ΔDIV
-0.009*
0.003
-0.000
0.002
(-1.932)
(0.911)
(-0.038)
(0.794)
ΔE(fy0)
0.238***
0.186**
(3.381)
(2.665)
ΔE(fy0)*I[E(fy0)<0]
-0.251***
-0.233***
-0.333***
(-2.959)
(-2.763)
(-5.527)
ΔE2(fy0)*I[E(fy0)<0]
0.343
0.244
-0.027
(1.389)
(1.001)
(-0.120)
ΔE2(fy0)*I[E(fy0)>0]
-1.010***
-0.856***
-0.801***
(-3.273)
(-2.782)
(-4.268)
E(fy0)
-0.048
-0.067
(-0.960)
(-1.301)
E(fy0)*I[E(fy0)<0]
-0.682***
-0.661***
-1.007***
(-5.587)
(-5.373)
(-8.191)
E2(fy0)*I[E(fy0)<0]
-0.302
-0.235
-0.771
(-0.524)
(-0.403)
(-1.296)
E2(fy0)*I[E(fy0)>0]
0.262
0.266*
-0.255*
(1.660)
(1.695)
(-1.831)
Ret(-2,-20)
0.048***
0.044***
(6.843)
(7.392)
Ret(-21,-40)
0.047***
0.044***
(6.776)
(7.384)
Ret(-41,-60)
0.039***
0.035***
(6.529)
(6.371)
Ret(-61,-120)
0.026***
0.027***
(6.220)
(7.626)
Ret(-121,-240)
0.012***
0.016***
(4.284)
(6.616)
Intercept
0.007***
-0.001
0.001
-0.009***
(2.936)
(-0.271)
(0.327)
(-3.250)
Quarterly Controls
Excluded
Excluded
Excluded
Included
Deflator
MVE(fy0)
MVE(fy0)
MVE(fy0)
MVE(fy0)
Observations
101,427
101,427
101,427
101,427
R-squared
0.000
0.092
0.099
0.126
This table reports OLS regression results. The dependent variable is the earnings change for the time period denoted
in the column header scaled by a lagged deflator denoted in the column footer. The primary variable of interest is
the percentage dividend change (ΔDIV). In column ΔE(fy0) is replaced with ΔE(fq1), ΔE(fq2), ΔE(fq3), and ΔE(fq4) and
E(fy0) is replaced with E(fq1), E(fq2), E(fq3), and E(fq4). Standard errors are clustered by year of the dividend declaration.
T-statistics are reported in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels
for two-tailed tests, respectively. Appendix A reports variable definitions. Figure 1 depicts the timeline for quarter
and year designations.
54
Table 4: Relation Between Dividend Changes and Other Measures of Information Content
Panel A: Future Earnings Changes Beyond the Subsequent Year
(1)
(2)
(3)
(4)
E(y+2) - E(y-1)
E(y+2) - E(y+1)
E(y+3) - E(y-1)
E(y+3) - E(y+2)
ΔDIV
0.013**
-0.011***
0.016***
0.001
(2.588)
(-2.868)
(2.726)
(0.269)
E(q-1)
0.346***
-0.167**
0.253**
-0.038
(3.989)
(-2.418)
(2.238)
(-0.707)
E(q-2)
0.135
-0.007
0.115
0.037
(1.654)
(-0.122)
(1.091)
(0.658)
E(q-3)
0.057
-0.001
0.038
-0.006
(0.723)
(-0.025)
(0.361)
(-0.118)
E(q-4)
-0.003
0.036
0.065
0.103*
(-0.034)
(0.604)
(0.569)
(1.754)
ΔE(q-1)
0.242***
-0.228***
0.273***
0.003
(3.946)
(-3.746)
(3.519)
(0.070)
ΔE(q-2)
0.016
-0.158***
-0.004
-0.060
(0.240)
(-3.062)
(-0.043)
(-1.082)
ΔE(q-3)
-0.014
-0.116**
-0.066
-0.043
(-0.197)
(-2.187)
(-0.741)
(-0.758)
ΔE(q-4)
-0.018
-0.145**
-0.141
-0.116*
(-0.234)
(-2.515)
(-1.344)
(-1.754)
Ret(-2,-20)
0.101***
0.015*
0.093***
-0.007
(8.409)
(1.970)
(8.143)
(-0.969)
Ret(-21,-40)
0.099***
0.016*
0.099***
0.001
(9.729)
(1.945)
(8.241)
(0.113)
Ret(-41,-60)
0.091***
0.010
0.087***
-0.001
(10.025)
(1.583)
(8.257)
(-0.175)
Ret(-61,-120)
0.069***
0.007
0.066***
-0.002
(9.103)
(1.544)
(7.809)
(-0.434)
Ret(-121,-240)
0.034***
0.006*
0.035***
0.003
(6.928)
(1.961)
(5.556)
(0.648)
Intercept
0.000
0.007**
0.006
0.003
(0.020)
(2.184)
(1.165)
(1.029)
Non-Linear
Controls
Included
Included
Included
Included
Deflator
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
Observations
92,734
92,734
86,448
86,448
R-squared
0.133
0.014
0.114
0.005
55
ΔDIV
X(q-1)
X(q-2)
X(q-3)
X(q-4)
ΔX(q-1)
ΔX(q-2)
ΔX(q-3)
ΔX(q-4)
Ret(-2,-20)
Ret(-21,-40)
Ret(-41,-60)
Ret(-61,-120)
Ret(-121,-240)
Intercept
(1)
ΔRev(y+1)
0.084**
(2.654)
0.320***
(8.658)
-0.017
(-0.827)
-0.071**
(-2.524)
-0.123***
(-3.637)
1.762***
(24.305)
-0.002
(-0.024)
-0.135*
(-2.011)
0.128*
(1.804)
0.224***
(4.632)
0.241***
(5.034)
0.242***
(5.331)
0.194***
(5.463)
0.051*
(1.895)
0.022**
(2.414)
(2)
ΔRev(q+1)
0.016***
(2.735)
0.098***
(11.395)
-0.003
(-0.417)
0.008
(1.225)
-0.089***
(-8.240)
0.645***
(46.379)
0.079***
(4.170)
0.048**
(2.619)
-0.156***
(-12.759)
0.032***
(3.302)
0.029***
(3.186)
0.045***
(5.372)
0.034***
(5.613)
0.007
(1.587)
0.003**
(2.388)
Panel B: Future Revenue Changes and Future Gross Profit Changes
(3)
(4)
(5)
(6)
(7)
ΔRev(q+2)
ΔRev(q+3)
ΔRev(q+4)
ΔGP(y+1)
ΔGP(q+1)
0.021**
0.022**
0.024**
0.026***
0.008***
(2.548)
(2.476)
(2.645)
(3.090)
(3.449)
0.091***
0.097***
0.008
0.327***
0.191***
(9.002)
(7.061)
(0.583)
(13.185)
(13.123)
0.008
-0.061***
0.011
-0.062
0.017
(0.955)
(-5.310)
(1.245)
(-1.493)
(1.423)
-0.060***
-0.002
-0.009
-0.079***
0.057***
(-4.522)
(-0.212)
(-0.979)
(-3.527)
(6.944)
-0.018*
-0.003
0.021*
-0.190***
-0.263***
(-1.699)
(-0.282)
(1.707)
(-6.158)
(-13.738)
0.553***
0.487***
0.108***
1.075***
0.435***
(27.910)
(17.693)
(3.956)
(17.212)
(23.906)
0.083***
-0.251***
0.099***
0.007
0.062***
(3.615)
(-9.928)
(4.193)
(0.127)
(3.554)
-0.285***
0.054***
0.076***
-0.191***
-0.076***
(-13.075)
(2.728)
(3.959)
(-4.051)
(-4.865)
0.126***
0.097***
0.089***
0.029
-0.129***
(7.741)
(3.700)
(3.070)
(0.667)
(-7.639)
0.060***
0.068***
0.066***
0.099***
0.017***
(4.347)
(5.080)
(4.726)
(7.816)
(7.746)
0.061***
0.077***
0.074***
0.102***
0.017***
(3.943)
(5.376)
(5.485)
(7.992)
(4.800)
0.061***
0.070***
0.074***
0.102***
0.021***
(5.390)
(5.149)
(4.491)
(7.821)
(7.985)
0.049***
0.056***
0.057***
0.069***
0.016***
(5.550)
(5.323)
(4.580)
(6.366)
(8.177)
0.010
0.013
0.020**
0.021**
0.005***
(1.455)
(1.652)
(2.220)
(2.476)
(3.392)
0.006***
0.006**
0.007**
0.017***
0.003***
(2.824)
(2.386)
(2.034)
(4.731)
(5.255)
(8)
ΔGP(q+2)
0.007***
(2.949)
0.115***
(8.162)
0.027***
(2.950)
-0.156***
(-8.468)
0.005
(0.528)
0.425***
(20.272)
0.104***
(5.831)
-0.267***
(-12.708)
0.053***
(3.687)
0.025***
(7.602)
0.027***
(6.585)
0.027***
(7.469)
0.020***
(6.620)
0.003
(1.425)
0.004***
(4.308)
(9)
ΔGP(q+3)
0.006***
(2.835)
0.130***
(9.240)
-0.148***
(-9.443)
0.014
(1.290)
0.004
(0.337)
0.360***
(15.606)
-0.251***
(-12.055)
0.052***
(2.868)
0.052***
(3.831)
0.030***
(7.068)
0.031***
(7.956)
0.032***
(7.682)
0.019***
(5.810)
0.004*
(1.688)
0.004***
(4.198)
(10)
ΔGP(q+4)
0.006**
(2.641)
-0.054***
(-3.668)
0.024
(1.461)
-0.007
(-0.730)
0.043***
(4.373)
-0.040*
(-1.801)
0.064**
(2.644)
0.034**
(2.463)
0.034**
(2.108)
0.028***
(5.600)
0.029***
(7.239)
0.029***
(6.850)
0.018***
(4.630)
0.008***
(2.859)
0.005***
(4.083)
Non-Linear
Controls
Included
Included
Included
Included
Included
Included
Included
Included
Included
Included
Deflator
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
Observations
99,121
99,121
99,121
99,121
99,121
81,808
81,808
81,808
81,808
81,808
R-squared
0.311
0.562
0.346
0.200
0.096
0.212
0.454
0.273
0.146
0.044
This table reports OLS regression results. In Panel A the dependent variable is the earnings change for the time period denoted in the column header scaled by a
lagged deflator denoted in the column footer. In Panel B the dependent variable is the revenue change or the gross profit change for the time period denoted in the
column header scaled by a lagged deflator denoted in the column footer. In Panel B "X" refers to the corresponding dependent variable ("Rev" or "GP"). The primary
variable of interest is the percentage dividend change (ΔDIV). Standard errors are clustered by year of the dividend declaration. T-statistics are reported in
parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels for two-tailed tests, respectively. Appendix A reports variable definitions.
Figure 1 depicts the timeline for quarter and year designations.
56
Table 5: Relation Between Dividend Increases or Decreases and Future Earnings Changes
(1)
(2)
(3)
(4)
(5)
ΔE(y+1)
ΔE(q+1)
ΔE(q+2)
ΔE(q+3)
ΔE(q+4)
ΔDIV
0.015***
0.005***
0.004***
0.003***
0.003**
(3.449)
(4.151)
(3.379)
(2.993)
(2.494)
ΔDIV*I[ΔDIV<0]
0.047***
0.015***
0.013***
0.008***
0.003
(5.280)
(6.344)
(4.916)
(3.045)
(1.120)
E(q-1)
0.498***
0.216***
0.096***
0.173***
-0.188***
(13.047)
(20.677)
(6.236)
(17.072)
(-6.554)
E(q-2)
0.142***
0.023**
0.086***
-0.238***
0.076***
(3.422)
(2.031)
(9.457)
(-8.831)
(5.326)
E(q-3)
0.078*
0.093***
-0.244***
0.055***
-0.026
(2.016)
(8.648)
(-8.713)
(5.001)
(-1.649)
E(q-4)
-0.029
-0.292***
0.017
-0.012
0.075***
(-0.764)
(-11.900)
(1.532)
(-0.905)
(5.696)
ΔE(q-1)
0.457***
0.220***
0.205***
0.114***
-0.237***
(7.835)
(11.265)
(11.671)
(6.235)
(-12.298)
ΔE(q-2)
0.139**
0.138***
0.074***
-0.274***
0.027**
(2.689)
(10.568)
(5.328)
(-11.864)
(2.052)
ΔE(q-3)
0.069
0.059***
-0.259***
0.050***
0.062***
(1.434)
(4.864)
(-13.193)
(3.515)
(4.482)
ΔE(q-4)
0.077
-0.213***
0.079***
0.063***
-0.002
(1.506)
(-14.687)
(5.539)
(5.008)
(-0.127)
Ret(-2,-20)
0.087***
0.017***
0.023***
0.022***
0.020***
(11.759)
(9.002)
(12.735)
(10.295)
(9.100)
Ret(-21,-40)
0.085***
0.016***
0.023***
0.021***
0.021***
(11.815)
(8.623)
(10.982)
(10.319)
(10.228)
Ret(-41,-60)
0.083***
0.018***
0.020***
0.021***
0.019***
(13.161)
(11.979)
(12.243)
(9.603)
(10.154)
Ret(-61,-120)
0.063***
0.015***
0.015***
0.015***
0.014***
(11.292)
(11.743)
(10.131)
(9.113)
(8.787)
Ret(-121,-240)
0.029***
0.006***
0.006***
0.006***
0.007***
(6.678)
(6.866)
(6.175)
(5.589)
(6.060)
Intercept
-0.007***
0.000
0.001**
0.002**
0.002**
(-2.927)
(0.264)
(2.275)
(2.593)
(2.691)
Non-Linear
Controls
Included
Included
Included
Included
Included
Deflator
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
Observations
99,350
99,350
99,350
99,350
99,350
R-squared
0.192
0.343
0.249
0.193
0.136
This table reports OLS regression results. The dependent variable is the earnings change for the time period denoted
in the column header scaled by a lagged deflator denoted in the column footer. The primary variables of interest are
the percentage dividend change (ΔDIV) and the interaction between the percentage dividend change and an indicator
variable equal to one if the dividend change is negative (ΔDIV*I[ΔDIV<0]). Standard errors are clustered by year of
the dividend declaration. T-statistics are reported in parentheses. ***, **, and * denote statistical significance at the
1%, 5%, and 10% levels for two-tailed tests, respectively. Appendix A reports variable definitions. Figure 1 depicts
the timeline for quarter and year designations.
57
Table 6: Relation Between Dividend Changes and Future Earnings Changes - Matching Analysis
Panel A: Dividend Decreases
N
DIVCHG=0
DIVCHG<0
Difference
T-stat
P-value
ΔE(q-4)
964
-0.0050
-0.0054
-0.0004
-0.2981
0.7660
ΔE(q-3)
964
-0.0068
-0.0076
-0.0008
-0.6105
0.5420
ΔE(q-2)
964
-0.0115
-0.0105
0.0010
0.6584
0.5100
ΔE(q-1)
964
-0.0130
-0.0142
-0.0012
-0.7844
0.4330
ΔE(q+1)
964
-0.0067
-0.0180
-0.0113
-6.3750
0.0000
ΔE(q+2)
964
-0.0014
-0.0113
-0.0099
-6.0770
0.0000
ΔE(q+3)
964
0.0023
-0.0044
-0.0067
-4.0656
0.0000
ΔE(q+4)
964
0.0069
0.0028
-0.0041
-2.4553
0.0140
E(q-4)
964
0.0208
0.0206
-0.0002
-0.1351
0.8930
E(q-3)
964
0.0181
0.0170
-0.0011
-0.8429
0.3990
E(q-2)
964
0.0120
0.0122
0.0002
0.0992
0.9210
E(q-1)
964
0.0085
0.0077
-0.0008
-0.5586
0.5770
E(q+1)
964
0.0138
0.0020
-0.0118
-7.6088
0.0000
E(q+2)
964
0.0161
0.0051
-0.0110
-7.3004
0.0000
E(q+3)
964
0.0145
0.0070
-0.0075
-4.7495
0.0000
E(q+4)
964
0.0147
0.0094
-0.0053
-3.2988
0.0010
ΔE(q-4)
ΔE(q-3)
ΔE(q-2)
ΔE(q-1)
ΔE(q+1)
ΔE(q+2)
ΔE(q+3)
ΔE(q+4)
E(q-4)
E(q-3)
E(q-2)
E(q-1)
E(q+1)
E(q+2)
E(q+3)
E(q+4)
N
13,512
13,512
13,512
13,512
13,512
13,512
13,512
13,512
13,512
13,512
13,512
13,512
13,512
13,512
13,512
13,512
DIVCHG=0
0.0028
0.0028
0.0035
0.0038
0.0017
0.0011
0.0005
0.0000
0.0212
0.0213
0.0227
0.0242
0.0229
0.0224
0.0231
0.0241
Panel B: Dividend Increases
DIVCHG>0
Difference
0.0027
-0.0001
0.0029
0.0001
0.0033
-0.0002
0.0040
0.0002
0.0039
0.0022
0.0032
0.0021
0.0023
0.0018
0.0014
0.0014
0.0215
0.0003
0.0214
0.0001
0.0228
0.0001
0.0244
0.0002
0.0254
0.0025
0.0246
0.0022
0.0251
0.0020
0.0258
0.0017
T-stat
-0.8291
0.2314
-0.9300
1.3088
10.7327
9.8382
7.8841
6.1408
1.4676
0.3588
0.3319
1.1199
9.5642
8.4250
6.6830
5.6170
P-value
0.4070
0.8170
0.3520
0.1910
0.0000
0.0000
0.0000
0.0000
0.1420
0.7200
0.7400
0.2630
0.0000
0.0000
0.0000
0.0000
This table reports the matching analysis results. In Panel A (B) each dividend decrease (increase) observation is matched
to an observation with no dividend change. Observations are matched via the level and change in earnings over quarters q4 to q-1. Both Panels report descriptive statistics for these eight variables as well as the level and change in earnings over
quarters q+1 to q+4. Figure 1 reports graphs that illustrate the change in earnings over quarters q-4 to q+4. Figure 2 reports
graphs that illustrate the level of earnings over quarters q-4 to q+12. N is the number of observations. Difference is the
mean for dividend change observations less the mean for no dividend change observations. T-stat and P-value report the
statistical significance of the corresponding difference. Appendix A reports variable definitions.
58
ΔDIV
ΔDIV*I[ΔDIV<0]
FE(y-1)
Ret(-2,-20)
Ret(-21,-40)
Ret(-41,-60)
Ret(-61,-120)
Ret(-121,-240)
Intercept
Controls
Observations
R-squared
Table 7: Analyst Responses to Dividend Changes
Panel A: Forecast Revisions
(1)
(2)
(3)
(4)
REV(y+1)
REV(y+1)
REV(q+1)
REV(q+2)
0.465**
0.312**
0.148***
0.106**
(2.439)
(2.620)
(3.346)
(2.341)
1.129**
(2.662)
0.038*
0.036
0.151***
0.019
(1.748)
(1.656)
(9.735)
(1.047)
2.923***
2.916***
0.613***
0.743***
(9.685)
(9.680)
(12.681)
(12.583)
1.894***
1.887***
0.548***
0.452***
(3.359)
(3.412)
(7.239)
(3.952)
2.356***
2.341***
0.476***
0.531***
(7.831)
(8.000)
(7.157)
(5.322)
1.485***
1.479***
0.397***
0.304***
(7.866)
(7.915)
(9.311)
(5.847)
0.400***
0.402***
0.201***
0.098**
(3.267)
(3.276)
(5.428)
(2.589)
-0.350***
-0.336***
-0.119***
-0.089***
(-3.863)
(-3.927)
(-9.044)
(-5.244)
(5)
REV(q+3)
0.090**
(2.336)
(6)
REV(q+4)
0.106***
(3.001)
0.015
(0.719)
0.652***
(9.481)
0.424***
(3.461)
0.533***
(6.816)
0.277***
(4.948)
0.090***
(3.202)
-0.067***
(-4.016)
0.036*
(1.983)
0.545***
(7.585)
0.405***
(4.369)
0.418***
(5.191)
0.245***
(5.707)
0.056
(1.482)
-0.054***
(-3.414)
Included
7,028
0.128
Included
11,240
0.069
Included
9,608
0.065
Included
7,028
0.132
Included
17,766
0.102
59
Included
13,014
0.070
ΔDIV
ΔDIV*Post
(1)
FE(y+1)
0.699*
(1.826)
-0.635***
(-2.806)
ΔDIV*I[ΔDIV<0]
ΔDIV*I[ΔDIV<0]*Post
Post
FE(y-1)
Ret(-2,-20)
Ret(-21,-40)
Ret(-41,-60)
Ret(-61,-120)
Ret(-121,-240)
Intercept
0.319***
(3.898)
0.254***
(4.028)
4.613***
(5.443)
3.330***
(3.990)
3.905***
(3.782)
3.158***
(7.239)
1.313***
(4.237)
-0.875***
(-3.332)
Panel B: Forecast Errors
(2)
(3)
FE(y+1)
FE(q+1)
0.550**
0.244***
(2.074)
(3.595)
-0.437***
-0.233***
(-3.567)
(-4.077)
1.098
(0.876)
-1.462**
(-2.183)
0.301***
0.116***
(4.048)
(7.755)
0.254***
0.358***
(4.050)
(13.570)
4.610***
0.429***
(5.431)
(5.726)
3.327***
0.532***
(3.995)
(5.344)
3.901***
0.523***
(3.800)
(7.902)
3.156***
0.351***
(7.229)
(7.630)
1.313***
0.191***
(4.229)
(5.427)
-0.862***
-0.112***
(-3.402)
(-5.121)
(4)
FE(q+2)
0.177*
(1.868)
-0.133**
(-2.628)
(5)
FE(q+3)
0.159
(1.545)
-0.106**
(-2.633)
(6)
FE(q+4)
0.173*
(1.893)
-0.113***
(-3.342)
0.082***
(5.094)
0.281***
(6.022)
1.085***
(9.485)
0.989***
(5.335)
0.993***
(4.904)
0.646***
(7.672)
0.388***
(5.785)
-0.210***
(-5.032)
0.058***
(3.895)
0.281***
(5.609)
1.235***
(6.486)
1.073***
(5.514)
1.061***
(3.352)
0.771***
(5.172)
0.443***
(5.395)
-0.270***
(-4.734)
0.046***
(3.296)
0.227***
(3.444)
1.236***
(4.653)
1.045***
(4.753)
1.172***
(4.597)
0.894***
(6.547)
0.316***
(3.401)
-0.299***
(-4.744)
Controls
Included
Included
Included
Included
Included
Included
Observations
14,056
14,056
35,532
26,028
22,480
19,216
R-squared
0.093
0.093
0.093
0.083
0.072
0.059
This table reports OLS regression results. The dependent variable is analyst forecast revisions in Panel A and analyst forecast
errors in Panel B. Standard errors are clustered by year of the dividend declaration. T-statistics are reported in parentheses.
***, **, and * denote statistical significance at the 1%, 5%, and 10% levels for two-tailed tests, respectively. Appendix A
reports variable definitions. Figure 1 depicts the timeline for quarter and year designations.
60
Ret(-1,+1)
Ret(-1,+1) *
I[ΔDIV≠0]
(1)
ΔE(y+1)
0.084***
(7.527)
(2)
ΔE(q+1)
0.022***
(7.212)
0.179***
(6.315)
0.045***
(5.593)
Table 8: Relation Between Dividend Declaration Returns and Future Earnings Changes
(3)
(4)
(5)
(6)
(7)
(8)
(9)
ΔE(q+2)
ΔE(q+3)
ΔE(q+4)
ΔE(y+1)
ΔE(y+1)
ΔE(q+1)
ΔE(q+2)
0.018***
0.019***
0.022***
0.197***
0.089***
0.052***
0.047***
(5.985)
(6.573)
(5.921)
(7.946)
(7.861)
(7.440)
(7.022)
0.049***
(5.740)
0.044***
(5.097)
0.072***
(2.845)
0.030
(1.096)
0.640***
(5.427)
0.206**
(2.330)
0.171
(1.427)
-0.102
(-0.936)
0.824***
(4.389)
0.256*
(1.761)
0.171
(1.143)
0.259*
(2.004)
-0.008**
(-2.479)
Ret(+4,+6)
E(q-2)
E(q-3)
E(q-4)
ΔE(q-1)
ΔE(q-2)
ΔE(q-3)
ΔE(q-4)
Intercept
0.525***
(12.657)
0.131***
(3.040)
0.063
(1.564)
-0.077*
(-1.760)
0.672***
(10.083)
0.237***
(4.623)
0.112**
(2.336)
0.133**
(2.491)
-0.005**
(-2.471)
0.225***
(22.927)
0.015
(1.258)
0.094***
(8.468)
-0.311***
(-11.985)
0.269***
(12.684)
0.162***
(11.897)
0.064***
(4.778)
-0.192***
(-11.997)
0.000
(1.062)
0.102***
(6.248)
0.090***
(8.268)
-0.251***
(-8.970)
0.010
(0.904)
0.259***
(13.441)
0.093***
(6.199)
-0.250***
(-11.997)
0.089***
(5.858)
0.002**
(2.651)
0.180***
(15.257)
-0.246***
(-8.656)
0.051***
(4.877)
-0.027*
(-1.910)
0.163***
(7.833)
-0.248***
(-11.389)
0.059***
(4.048)
0.074***
(5.366)
0.002***
(3.280)
(11)
ΔE(q+4)
0.032***
(3.827)
0.019**
(2.412)
0.017*
(1.955)
0.187***
(4.773)
-0.162***
(-3.838)
0.092**
(2.490)
-0.043
(-1.525)
0.243***
(4.219)
-0.244***
(-4.534)
0.077*
(1.974)
0.137***
(3.669)
0.001
(0.544)
0.022***
(2.823)
0.005
(0.475)
-0.123**
(-2.382)
0.068***
(3.127)
-0.029
(-0.710)
0.064**
(2.175)
-0.177***
(-5.545)
0.058
(1.642)
0.060*
(1.710)
0.059**
(2.035)
0.002*
(1.683)
0.026***
(3.041)
Ret(-6,-4)
E(q-1)
(10)
ΔE(q+3)
0.048***
(5.551)
-0.189***
(-6.512)
0.072***
(5.131)
-0.033*
(-1.967)
0.069***
(4.809)
-0.186***
(-9.463)
0.047***
(3.338)
0.073***
(5.763)
0.003
(0.165)
0.002***
(3.431)
0.069***
(3.682)
0.069***
(6.148)
0.517***
(10.370)
0.116***
(2.864)
0.046
(1.153)
-0.090**
(-2.032)
0.661***
(10.708)
0.184***
(3.623)
0.053
(1.098)
0.118**
(2.293)
-0.004**
(-2.073)
0.015**
(2.464)
0.000
(0.051)
0.248***
(8.882)
-0.013
(-0.411)
0.086***
(3.302)
-0.310***
(-7.992)
0.298***
(6.542)
0.147***
(4.144)
0.075**
(2.128)
-0.201***
(-5.444)
0.001
(0.827)
0.012
(1.611)
0.012
(1.597)
0.114***
(3.324)
0.118***
(2.822)
-0.200***
(-4.878)
0.001
(0.046)
0.334***
(7.675)
0.142***
(3.123)
-0.221***
(-5.160)
0.130***
(3.878)
0.001
(0.587)
Ret(-1,+1) =
Ret(-6,-4)
p<0.01
p>0.10
p<0.01
p<0.01
p<0.05
p>0.10
Ret(-1,+1) =
Ret(+4,+6)
p<0.01
p>0.10
p<0.01
p<0.01
p<0.05
p<0.05
Sample
All
All
All
All
All
ΔDIV≠0
ΔDIV=0
ΔDIV≠0
ΔDIV≠0
ΔDIV≠0
ΔDIV≠0
Non-Linear
Controls
Included
Included
Included
Included
Included
Included
Included
Included
Included
Included
Included
Deflator
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
Observations
83,434
83,434
83,434
83,434
83,434
9,571
58,516
9,571
9,571
9,571
9,571
R-squared
0.150
0.325
0.224
0.170
0.113
0.150
0.160
0.388
0.234
0.151
0.109
This table reports OLS regression results. The dependent variable is the earnings change for the time period denoted in the column header scaled by a lagged deflator denoted in
the column footer. In columns 1-5 the independent variables include three-day returns centered on the dividend declaration date (Ret(-1,+1)) and its interaction with an indicator
variable equal to one if the dividend change is non-zero (I[ΔDIV≠0]). In columns 6-11 the independent variables include three-day returns centered on the dividend declaration
date (Ret(-1,+1)), five trading days before the dividend declaration date (Ret(-6,-4)), and five trading days after the dividend declaration date (Ret(+4,+6)). Standard errors are
clustered by year of the dividend declaration. T-statistics are reported in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels for two-tailed
tests, respectively. Appendix A reports variable definitions. Figure 1 depicts the timeline for quarter and year designations.
61
Table 9: Effect of Information Asymmetry on the Relation Between Dividend Changes and Future Earnings Changes
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
ΔE(y+1)
ΔE(y+1)
ΔE(y+1)
ΔE(y+1)
ΔE(y+1)
ΔE(y+1)
ΔE(y+1)
ΔE(y+1)
ΔDIV
0.016*** 0.031***
-0.005
0.008
-0.003
0.011***
0.016***
0.025***
(3.283)
(3.907)
(-0.531)
(1.502)
(-0.612)
(2.915)
(3.177)
(3.403)
Late
0.002**
(2.054)
ΔDIV*Late
0.028***
(4.405)
Frequency
-0.021
(-1.605)
ΔDIV*Frequency
-0.098**
(-2.472)
SD(Returns)
-0.947***
(-4.159)
ΔDIV*SD(Returns)
1.820***
(3.803)
SD(CashFlows)
-0.030
(-1.628)
ΔDIV*SD(CashFlows)
0.071
(0.990)
SD(Forecasts)
-0.152**
(-2.478)
ΔDIV*SD(Forecasts)
0.578***
(3.107)
1/Coverage
0.013***
(4.305)
ΔDIV*1/Coverage
0.023***
(3.155)
1/MVE
0.147***
(2.856)
ΔDIV*1/MVE
0.804***
(5.378)
1/Age
0.015
(1.335)
ΔDIV*1/Age
-0.027
(-0.728)
Intercept
-0.007*** -0.006**
0.007**
-0.001
0.002
-0.009*** -0.007*** -0.008***
(-3.144)
(-2.503)
(2.245)
(-0.471)
(0.907)
(-3.538)
(-3.122)
(-3.253)
Controls
Included
Included
Included
Included
Included
Included
Included
Included
Non-Linear
Controls
Included
Included
Included
Included
Included
Included
Included
Included
Deflator
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
MVE(q-1)
Observations
99,350
97,970
97,970
52,062
41,826
98,162
99,350
99,350
R-squared
0.192
0.191
0.195
0.244
0.257
0.198
0.194
0.191
This table reports OLS regression results. The dependent variable is the earnings change for the time period denoted in the column header scaled by
a lagged deflator denoted in the column footer. The primary variable of interest is the interaction between the percentage dividend change (ΔDIV)
and the corresponding information asymmetry proxy. The control variables included, but not reported, are the eight earnings variables and the five
return variables reported in Table 2. Standard errors are clustered by year of the dividend declaration. T-statistics are reported in parentheses. ***,
**, and * denote statistical significance at the 1%, 5%, and 10% levels for two-tailed tests, respectively. Appendix A reports variable definitions.
Figure 1 depicts the timeline for quarter and year designations.
62
Table 10: Effect of Information Asymmetry on the Relation Between Dividend Changes and Dividend Declaration Returns
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Ret(-1,+1)
Ret(-1,+1)
Ret(-1,+1)
Ret(-1,+1)
Ret(-1,+1)
Ret(-1,+1)
Ret(-1,+1)
Ret(-1,+1)
ΔDIV
0.020*** 0.026***
0.009*
0.013*** 0.011*** 0.013*** 0.016*** 0.020***
(6.465)
(6.277)
(1.775)
(5.813)
(3.015)
(5.463)
(6.113)
(5.625)
Late
-0.000
(-1.282)
ΔDIV*Late
0.007**
(2.536)
Frequency
0.001
(0.394)
ΔDIV*Frequency
-0.066***
(-3.774)
SD(Returns)
0.005
(0.110)
ΔDIV*SD(Returns)
0.809***
(3.359)
SD(CashFlows)
-0.003
(-0.526)
ΔDIV*SD(CashFlows)
0.038
(1.487)
SD(Forecasts)
-0.009
(-0.441)
ΔDIV*SD(Forecasts)
0.088
(0.712)
1/Coverage
-0.001***
(-3.019)
ΔDIV*1/Coverage
0.016***
(4.805)
1/MVE
-0.010
(-1.196)
ΔDIV*1/MVE
0.506***
(5.694)
1/Age
-0.004
(-1.361)
ΔDIV*1/Age
0.021
(1.207)
Intercept
0.000
0.000
0.000
0.001
0.001
0.000
0.000
0.000
(0.465)
(0.135)
(0.255)
(1.321)
(0.822)
(0.849)
(0.573)
(0.682)
Controls
Included
Included
Included Included Included
Included
Included Included
Non-Linear
Controls
Included
Included
Included Included Included
Included
Included Included
Observations
83,434
82,304
82,304
42,603
35,037
82,468
83,434
83,434
R-squared
0.011
0.011
0.011
0.007
0.005
0.012
0.013
0.011
This table reports OLS regression results. The dependent variable is the three-day return centered on the dividend declaration date.
Dividend declarations less than three days from an earnings announcement are excluded. The primary variable of interest is the interaction
between the percentage dividend change (ΔDIV) and the corresponding information asymmetry proxy. The control variables included,
but not reported, are the eight earnings variables and the five return variables reported in Table 2. Standard errors are clustered by year of
the dividend declaration. T-statistics are reported in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10%
levels for two-tailed tests, respectively. Appendix A reports variable definitions. Figure 1 depicts the timeline for quarter and year
designations.
63
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