Do dividends signal future earnings in the Nordic stock markets?

Abstract

We study the informational content of dividends on three Nordic civil law markets, where other simultaneous but blurring motives for dividends may be weaker. Using aggregate data on real earnings per share and payout ratios, long time series from 1969 to 2010, and methodologies which address problems of endogeneity, non-stationarity and autocorrelation (including a Vector Error Correction Model approach), we find evidence on dividend signaling in Nordic markets. However, we also find heterogeneity in the relationship between dividends and earnings on markets similar in many respects, suggesting that even small variations in the institutional surroundings may be important for the results.

Do Firms Use Dividend Changes to Signal Future Earnings? An Investigation Based on Market Rationality

“…Leftwich and Zmijewski (1994) suggest that a reduction in dividends indicates serious long term deterioration in a firm"s future performance. Nissim and Ziv (2001), (Chen & Kao, 2014), and (Liljeblom, Mollah, & Rotter, 2015) find a positive association between dividend changes and changes in future earnings. Brav et al, (2005) present findings based on an extensive survey indicating that managers believe that dividend payments convey information to outsiders about future earnings.…”

Signaling Effect of Dividend on Firm’s Future Performance: A Study of Select Emerging Economies

“…Carroll (1995) found a significant positive relationship between earnings forecast revisions and dividend changes. Similarly, many researchers including Brook et al (1998), Liljeblom et al (2015), and Lee and Rui (2007) have found positive reactions of dividends on earnings while Farsio et al (2004) and Grullon et al (2005) have found no relationship between dividends and earning. Lee (2010a) and Lee (2010b) applied dividend signaling to the Australian and Singapore markets to establish the impact of dividend signaling and supported Lintner (1956).…”

“…A more direct approach to study the informational content of dividends is the time-series relationship between dividends and future earnings, as mentioned by Liljeblom et al (2015). Kao and Wu (1994) showed that there was a positive relationship between unexpected dividends and earnings.…”

“…Reddemann et al (2010) examined German and European insurance companies by considering quarterly data and did not find any empirical evidence supporting these theories. Liljeblom et al (2015) discovered that dividends do Granger causes future earnings in the case of Sweden and Norway and not in the case of Denmark. Azhagaiah and Gejalakshmi (2015) found out that earnings per share (EPS), dividend per share (DPS), and retained earnings per share (REPS) have long-term association and positive relationship between DPS and EPS (Shareholder wealth) and DPS causing EPS.…”

“…However, mixed results are reported with scant evidence on whether dividends convey any information about future earnings, especially in emerging markets. Recent studies have found evidence of the informational content of dividends (Al-Najjar & Kilincarslan, 2019; Hoang & Hoxha, 2020; Liljeblom et al, 2015). However, DeAngelo et al (2004) and Benartzi et al (1997) found limited support for the view that dividend changes have information content.…”