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Dividend Changes and the Persistence of Past Earnings Changes



  • AMY X. SUN

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    • Both authors are with Carnegie Mellon University. We are grateful for the helpful comments of Douglas Diamond (the editor), an anonymous referee, Eli Bartov, Robert Freeman, Zhaoyang Gu, Pierre Liang, Partha Mohanram, Sandeep Nabar, Raghuram Rajan, Sundaresh Ramnath, Stephen Ryan, Katherine Schipper, Nathan Stuart, Senyo Tse, Teri Yohn, Kristina Zvinakis, colleagues at Carnegie Mellon University, and workshop participants at Georgetown University, New York University, the University of Florida, and the University of Texas at Austin. Any errors are our own.


We examine whether the market interprets changes in dividends as a signal about the persistence of past earnings changes. Prior to observing this signal, investors may believe that past earnings changes are not necessarily indicative of future earnings levels. We empirically investigate whether a change in dividends alters investors' assessments about the valuation implications of past earnings. Results confirm the hypothesis that changes in dividends cause investors to revise their expectations about the persistence of past earnings changes. This effect varies predictably with the magnitude of the dividend change and the sign of the past earnings change.