The Market's Differential Reactions to Forward-Looking and Backward-Looking Dividend Changes
Empirical evidence on the signaling hypothesis of dividends is weak and mixed. Recent studies find that dividend changes reflect mostly current and past earnings but not future earnings. We provide a model in which not all dividend changes contain new information about future earnings. Some dividend decisions are backward looking (noninformation or nonsignaling events). Other dividend decisions are forward looking (information or signaling events). The model helps identify the two types of dividend changes and predicts that the market will respond strongly only to forward-looking dividend changes. We provide evidence consistent with the implications of the model. 2003 The Southern Finance Association and the Southwestern Finance Association.
Year of publication: |
2003
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Authors: | Lee, Bong-Soo ; Yan, Nairong Allen |
Published in: |
Journal of Financial Research. - Southern Finance Association - SFA, ISSN 0270-2592. - Vol. 26.2003, 4, p. 449-468
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Publisher: |
Southern Finance Association - SFA Southwestern Finance Association - SWFA |
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