Benartzi is from the University of California Los Angeles. Michaely is from Cornell University and is affiliated with Tel Aviv University. Thaler is from the University of Chicago and is a research associate at the NBER. We thank the seminar participants at Boston University, Cornell University, Dartmouth, Hebrew University, UCLA, the 1996 American Finance Association Meetings, the NBER Corporate Finance Meetings, the 1995 CRSP Conference, and the 1995 Finance in Tel-Aviv Conference, Franklin Allen, Michael Brennan, Kenneth French, Ronen Israel, Avner Kalay, Shmuel Kandel, Maureen O'Hara, Jane Ou, Krishna Palepu, Arthur Raviv, Oded Sarig, Andrei Shleifer, Chester Spatt, Laura Starks, K.R. Subramanyam, Kent Womack, and especially Brad Barber, Alon Brav, Eugene Fama, Jay Ritter, and Robert Vishny. Remaining errors are ours.
Do Changes in Dividends Signal the Future or the Past?
Article first published online: 18 APR 2012
1997 The American Finance Association
The Journal of Finance
Volume 52, Issue 3, pages 1007–1034, July 1997
How to Cite
BENARTZI, S., MICHAELY, R. and THALER, R. (1997), Do Changes in Dividends Signal the Future or the Past?. The Journal of Finance, 52: 1007–1034. doi: 10.1111/j.1540-6261.1997.tb02723.x
- Issue published online: 18 APR 2012
- Article first published online: 18 APR 2012
Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. We investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years − 1 and 0, but show no subsequent unexpected earnings growth. Also, the size of the dividend increase does not predict future earnings. Firms that cut dividends in year 0 have experienced a reduction in earnings in year 0 and in year − 1, but these firms go on to show significant increases in earnings in year 1. However, consistent with Lintner's model on dividend policy, firms that increase dividends are less likely than nonchanging firms to experience a drop in future earnings. Thus, their increase in concurrent earnings can be said to be somewhat “permanent.” In spite of the lack of future earnings growth, firms that increase dividends have significant (though modest) positive excess returns for the following three years.