An Empirical Study of Dividend Payout and Future Earnings in Singapore

This paper applies Johansen’s vector error-correction model (VECM) to investigate for the existence of the dividend signalling effect in the Singapore aggregate market through impulse response analysis, forecast error variance decomposition and granger-causality test. Our findings show that a unit shock increase in dividend payout leads to a permanent increase in future earnings over time, thus supporting the existence of informational/signalling content in dividend payout in the Singapore market over the long run. We further find that at least half of the forecast error variance in earnings can be accounted for by innovations in the dividend payout, while the payout ratio is also shown to granger-cause earnings in the Singapore market.