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Dividend Changes Do Not Signal Changes in Future Profitability

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Author Info
Gustavo Grullon (Rice University)
Roni Michaely (Cornell University and the Interdisciplinary Center)
Shlomo Benartzi (University of California at Los Angeles)
Richard H. Thaler (University of Chicago and the National Bureau of Economic Research)

Additional information is available for the following registered author(s):

Abstract

One of the most important predictions of the dividend-signaling hypothesis is that dividend changes are positively correlated with future changes in profitability and earnings. Contrary to this prediction, we show that, after controlling for the well-known nonlinear patterns in the behavior of earnings, dividend changes contain no information about future earnings changes. We also show that dividend changes are negatively correlated with future changes in profitability (return on assets). Finally, we investigate whether including dividend changes improves out-of-sample earnings forecasts. We find that models that include dividend changes do not outperform those that do not include dividend changes.

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File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB780502
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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 78 (2005)
Issue (Month): 5 (September)
Pages: 1659-1682
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Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:5:p:1659-1682

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Postal: The University of Chicago Press, Journals Division, P.O. Box 37005 Chicago, IL 60637
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  1. Braggion, F. & Moore, L., 2008. "Dividend Policies in an Unregulated Market: The London Stock Exchange 1895-1905," Discussion Paper 2008-83, Tilburg University, Center for Economic Research. [Downloadable!]
  2. Joos, Peter & Plesko, George, 2004. "Costly Dividend Signaling: The Case of Loss Firms with Negative Cash Flows," Working papers Costly Dividend Signaling, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  3. Bogdan Stacescu, 2006. "Dividend Policy in Switzerland," Financial Markets and Portfolio Management, Springer, vol. 20(2), pages 153-183, June. [Downloadable!] (restricted)
  4. Arturo, Ramirez Verdugo, 2004. "Dividend Signaling and Unions," MPRA Paper 2273, University Library of Munich, Germany, revised 04 Oct 2006. [Downloadable!]
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