Summary
Extant empirical literature does not provide abundant evidence for the information content hypothesis regarding firm-level dividend signaling. Although this is consistent with the argument against an optimal firm-level dividend policy, this does not imply an absence of an optimal aggregate dividend level. Aggregate dividends and earnings may exhibit stronger associations if aggregation filters out firm-specific earnings information and indicates macroeconomic trends. Using macroeconomic data, we show that aggregate payout ratios signal aggregate future earnings growth for horizons up to 4 years, and that excess aggregate liquidity plays an important role in this relationship.
See the full content of this document
Extract
Do Liquidity Induced Changes in Aggregate Dividends Signal Aggregate Future Earnings Growth?
1 Introduction
In a recent survey of 384 financial executives, Brav et al. (2004) confirm Lintner's (1956) observation that managers only increase dividends when strong earnings are sustainable in the future. However, extant empirical literature provides limited evidence that dividend changes signal future earnings growth at the firm level. Nissim and Ziv (2001) find that dividend increases signal future abnormal profits. Conversely, Benartzi et al. (1997), and subsequently, Benartzi et al. (2003) find no evidence that dividend changes signal future earnings growth. The lack of consistent evidence between theory and corporate practice is puzzling.Although Miller and Modigliani (1961) argue that there is no optimal dividend policy at the firm level, this does not imply that there is no optimal dividend level at the macroeconomic level. Marsh and Merton (1987) find that aggregate dividends display systematic time series behavior, casting doubt on the ability of firm-specific dividend behavior to wholly explain the dividend puzzle. The relationship between aggregate dividends and aggregate earnings may actually be stronger than firm-level relationships if aggregation filters out firm-specific earnings information and signifies macroeconomic trends. Th...See the full content of this document
Sponsored links
