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Do Firms Use Dividend Changes to Signal Future Earnings? An Investigation Based on Market Rationality

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  • Ijaz Ali
  • Noor Muhammad
  • Ali Gohar

Abstract

Are dividend changes informative? If yes, do they convey information about future earnings? Given the importance of the issue to corporate finance and because of the puzzling results of previous studies, we investigate the association among dividend changes, stock returns, and future earnings. Following 928 French and 995 German firms from 1991 to 2010, we expect that only those dividend changes will be positively associated with future earnings that result in abnormal stock returns. Inconsistent with our expectations, we find that the association between current dividend changes and future earnings changes for firms with the highest abnormal returns in the dividend change direction is not stronger than the rest of the firms. These findings cast doubt on the signaling theory, which claims that dividend changes convey information about changes in future earnings.

Suggested Citation

  • Ijaz Ali & Noor Muhammad & Ali Gohar, 2017. "Do Firms Use Dividend Changes to Signal Future Earnings? An Investigation Based on Market Rationality," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(4), pages 20-34, April.
    • Handle: RePEc:ibn:ijefaa:v:9:y:2017:i:4:p:20-34
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    References listed on IDEAS

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    More about this item

    Keywords

    dividends; reported earnings; signaling theory; abnormal returns; information content of dividends;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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