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Rational Expectations, Information Signalling and Dividend Adjustment to Permanent Earnings

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  • Kao, Chihwa
  • Wu, Chunchi

Abstract

The authors propose a rational signaling model to investgate the information content of dividends. The model provides a direct test of the relation between unexpected dividend and earnings changes. In identifying the component of unexpected dividend changes, the authors suggest an expectations framework that accounts for the process of dividend adjustment to firms' permanent earnings. A nonlinear regression method is used to estimate the model and test the rationality and signaling hypotheses. Consistent with Paul Healy and Krishna Palepu's (1988) findings, the results show that dividends reflect past, current, and future earnings information. Copyright 1994 by MIT Press.

Suggested Citation

  • Kao, Chihwa & Wu, Chunchi, 1994. "Rational Expectations, Information Signalling and Dividend Adjustment to Permanent Earnings," The Review of Economics and Statistics, MIT Press, vol. 76(3), pages 490-502, August.
    • Handle: RePEc:tpr:restat:v:76:y:1994:i:3:p:490-502
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    Cited by:

    1. Chen, Chung & Wu, Chunchi, 1999. "The dynamics of dividends, earnings and prices: evidence and implications for dividend smoothing and signaling," Journal of Empirical Finance, Elsevier, vol. 6(1), pages 29-58, January.
    2. King Fuei Lee, 2010. "An Empirical Study of Dividend Payout and Future Earnings in Singapore," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 267-286.
    3. Wu, Chunchi, 1996. "Taxes and dividend policy," International Review of Economics & Finance, Elsevier, vol. 5(3), pages 291-305.
    4. Eva Liljeblom & Sabur Mollah & Patrik Rotter, 2015. "Do dividends signal future earnings in the Nordic stock markets?," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 493-511, April.
    5. Pan, Ming-Shiun, 2007. "Permanent and transitory components of earnings, dividends, and stock prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(4), pages 535-549, September.
    6. Wu, Chunchi & Hsu, Junming, 1996. "The Impact of the 1986 Tax Reform on Ex-Dividend Day Volume and Price Behavior," National Tax Journal, National Tax Association, vol. 49(2), pages 177-92, June.
    7. Wu, Chunchi & Hsu, Junming, 1996. "The Impact of the 1986 Tax Reform on Ex-Dividend Day Volume and Price Behavior," National Tax Journal, National Tax Association;National Tax Journal, vol. 49(2), pages 177-192, June.

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