Reversal of fortune dividend signaling and the disappearance of sustained earnings growth

Reversal of fortune dividend signaling and the disappearance of sustained earnings growth We study the signaling content of managers' dividend decisions for 145 NYSE firms whose annual earnings decline after nine or more consecutive years of growth. Using a variety of model specifications and definitions of favorable dividend signals, we find virtually no support for the notion that dividend decisions help identify firms with superior future earnings. Dividends tend not to be reliable signals because (i) a behavioral bias (overoptimism) leads managers to overestimate future earnings when growth prospects fade; and (ii) managers make only modest cash commitments when they increase dividends, undermining the reliability of such signals. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Reversal of fortune dividend signaling and the disappearance of sustained earnings growth

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Publisher
Elsevier
Copyright
Copyright © 1996 Elsevier Ltd
ISSN
0304-405x
D.O.I.
10.1016/0304-405X(95)00850-E
Publisher site
See Article on Publisher Site

Abstract

We study the signaling content of managers' dividend decisions for 145 NYSE firms whose annual earnings decline after nine or more consecutive years of growth. Using a variety of model specifications and definitions of favorable dividend signals, we find virtually no support for the notion that dividend decisions help identify firms with superior future earnings. Dividends tend not to be reliable signals because (i) a behavioral bias (overoptimism) leads managers to overestimate future earnings when growth prospects fade; and (ii) managers make only modest cash commitments when they increase dividends, undermining the reliability of such signals.

Journal

Journal of Financial EconomicsElsevier

Published: Mar 1, 1996

References

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