Do dividends signal more earnings?

Marcos H. Tsuchida, Aloisio Araujo and Humberto Moreira ()

No 524, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: Signaling models have contributed to the corporate finance literature by formalizing 'the informational content of dividends' hypothesis. However, these models are under criticism of empirical literature, as weak evidences were found supporting one of the main predicitions: the positive relation between changes in dividends and changes in earnings. We claim thaht the failure to verify this prediction does not invalidate the signaling approach. The models developed up to now assume or derive utility functions with the single-crossing property. We show thaht signaling is possible in the absence of this property and, in this case, changes in dividend and changes in earnings can be positively or negatively related.

Date: 2004-02-01
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