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The asymmetric response of dividends to earnings news

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  • Cho, Jin Seo
  • Greenwood-Nimmo, Matthew
  • Shin, Yongcheol

Abstract

We provide new evidence of sign asymmetry in dividend payout policy in the postwar period in the U.S. Using a nonlinear autoregressive distributed lag model, we show that managers: (i) smooth the time-path of dividends relative to earnings; (ii) target a higher long-run payout ratio when earnings increase than when they decrease; and (iii) cut dividends faster than they raise dividends. Our findings are consistent with existing research on the implications of agency problems and signaling effects for payout policy.

Suggested Citation

  • Cho, Jin Seo & Greenwood-Nimmo, Matthew & Shin, Yongcheol, 2023. "The asymmetric response of dividends to earnings news," Finance Research Letters, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323001654
    DOI: 10.1016/j.frl.2023.103792
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    References listed on IDEAS

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    1. Cho, Jin Seo & Kim, Tae-hwan & Shin, Yongcheol, 2015. "Quantile cointegration in the autoregressive distributed-lag modeling framework," Journal of Econometrics, Elsevier, vol. 188(1), pages 281-300.
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    6. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September.
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    9. Ham, Charles G. & Kaplan, Zachary R. & Leary, Mark T., 2020. "Do dividends convey information about future earnings?," Journal of Financial Economics, Elsevier, vol. 136(2), pages 547-570.
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    11. Pettit, R Richardson, 1972. "Dividend Announcements, Security Performance, and Capital Market Efficiency," Journal of Finance, American Finance Association, vol. 27(5), pages 993-1007, December.
    12. Andres, Christian & Betzer, André & Goergen, Marc & Renneboog, Luc, 2009. "Dividend policy of German firms: A panel data analysis of partial adjustment models," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 175-187, March.
    13. Long Chen & Zhi Da & Richard Priestley, 2012. "Dividend Smoothing and Predictability," Management Science, INFORMS, vol. 58(10), pages 1834-1853, October.
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    More about this item

    Keywords

    Payout policy; Dividend smoothing; Sign asymmetry; Two-step estimation;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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