Informational content of cash dividends and retained earnings: evidence from South Africa

Net profit for the year can either be distributed as dividends or be retained by the firm. We examine informational content of both channels of conveying value to shareholders of Johannesburg Stock Exchange-listed companies between 2010 and 2017. Motivated by conflicting dividend policy theories and respective empirical findings, the study is aimed at proffering empirical evidence that assists equity investors' investment decisions. Using an autoregressive distributed lag model in system GMM with panel data, both cash dividends and retained earnings exhibited a positive association with market capitalisation but, in both cases, the association lacks statistical significance. This means that both variables do not have information that explicates firm value variations. To forecast firm value, equity investors should therefore not rely on models anchored on either cash dividends or retained earnings. By extension, company executives are advised to avoid making dividend policy changes with the aim of positively influencing firm value. A novel contribution of this study is that investors are not worried about how value created is conveyed to them because they can still enjoy it in either form. We conclude that payment or non-payment of dividends neither creates nor destroys firm value.