Dividend Changes Do Not Signal Changes in Future Profitability

Gustavo Grullon, Roni Michaely, Shlomo Benartzi and Richard H. Thaler
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Gustavo Grullon: Rice University
Shlomo Benartzi: University of California at Los Angeles

Journal of Business, 2005, vol. 78, issue 5, pages 1659-1682

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.

Date: 2005
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