Dividend Changes and Future Profitability: A Revisit based on Earnings Volatility
Date
2014-08-21
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Journal ISSN
Volume Title
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ORCID
Type
Degree Level
Masters
Abstract
We investigate whether dividend changes signal firms’ future profitability by considering firms’ earnings volatility and examining how earnings volatility affects dividend signaling. In general, we find a positive relation between dividend increases on firms’ future earnings. In other words, dividend increases tend to signal positive changes in future earnings. However, the effect largely depends on the firms’ earnings volatility such that higher earnings volatility tends to miti-gate the signaling effect of dividend increases on future earnings. Specifically, for firms that have high earnings volatility, dividend increases seem to signal a reduction in future earnings vol-atility rather than an increase in future earnings. On the other hand, we find no consistent results for dividend decreases. Our findings have three main implications: 1) The traditional dividend signaling theory is valid; 2) the effect of signaling depends on a firm’s earnings volatility; 3) for high-volatility firms, positive dividend changes signal earnings volatility reductions rather than earnings increases.
Description
Keywords
dividend changes, signaling, earnings, profitability
Citation
Degree
Master of Science (M.Sc.)
Department
Edwards School of Business
Program
Finance