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The Association Between Operating Cash Flows and Dividend Changes: An Empirical Investigation

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Author Info

  • Andreas Charitou

    (Department of Public and Business Administration, School of Economics and Management, University of Cyprus, Nicosia, Cyprus)

  • Nikos Vafeas

    (Department of Public and Business Administration, School of Economics and Management, University of Cyprus, Nicosia, Cyprus)

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    Abstract

    The Association between earnings and dividend changes has been established since Lintner's (1956) pioneering work. Subsequent research attempted to establish an association between operating cash flows and dividend changes, given earnings, without success (Simons, 1994). Recently, there has been increased attention in cash flow reporting. Regulatory bodies worldwide have stressed the significance of cash flow information in capital markets. Research on the association between cash flows and dividends has been limited, yielding inconclusive results. The purpose of this study is to re-evaluate and extend prior studies by examining the incremental ability of cash flows to explain dividend changes, given earnings. We argue that a positive relationship between cash flows and dividend changes should exist due to liquidity and accruals management considerations. The empirical evidence of this study supports that the dividend changes-cash flow relationship is significantly positive (a) when operating cash flows are low compared to earnings, and (b) when firm growth is moderate. Copyright Blackwell Publishers Ltd 1998.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 25 (1998-01)
    Issue (Month): 1&2 ()
    Pages: 225-249

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    Handle: RePEc:bla:jbfnac:v:25:y:1998-01:i:1&2:p:225-249

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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    Cited by:
    1. Basil Al-Najjar & Yacine Belghitar, 2012. "The information content of cashflows in the context of dividend smoothing," Economic Issues Journal Articles, Economic Issues, vol. 17(2), pages 57-70, September.
    2. Daunfeldt, Sven-Olov & Selander, Carina & Wikström, Magnus, 2006. "Taxation, Dividend Payments and Ex-Day Price Changes," UmeÃ¥ Economic Studies 684, Umeå University, Department of Economics.
    3. Andreas Charitou & Evi Neophytou & Chris Charalambous, 2004. "Predicting corporate failure: empirical evidence for the UK," European Accounting Review, Taylor & Francis Journals, vol. 13(3), pages 465-497.
    4. Takashi Obinata, 2002. "Concept and Relevance of Income," CIRJE F-Series CIRJE-F-171, CIRJE, Faculty of Economics, University of Tokyo.

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