Management Forecasting Ability and Predictive Ability of Dividend Changes for Future Earnings

Abstract

We revisit the predictive ability of dividend changes for firms’ future earnings and extend the literature by examining the effect of management forecasting ability. Although prior studies have examined the relationship between dividend changes and future earnings, the empirical evidence is mixed. The belief that dividend changes have implications for future earnings depends on the assumption that managers can accurately assess future earnings prospects. In this regard, we posit that the predictive ability of dividends can vary with managers’ forecasting ability. Analyzing a large sample of Japanese dividend-paying firms, we find that dividend changes, particularly dividend increases, are positively associated with increases in future earnings. Consistent with our hypothesis, this positive association is more pronounced for firms with high-forecasting ability managers. Our findings support the signaling theory of dividend changes and indicate that management forecasting ability has a moderating effect on the linkage between firms’ dividend changes and future earnings.

Institutional shareholder services' proxy voting guidelines and ROE management

“…Among discretionary activity variables, we find that the median of REP takes the value of zero, while that of DIV takes a positive value. These results are consistent with the notion that stock repurchases are less common and managers attach more importance to dividends as a payout policy in Japan (Chang et al, 2021).…”

“…Regarding the denominator, managers can improve ROE by reducing equity capital through dividend payments and stock repurchases. While Japanese firms tend to attach more importance to dividends than stock repurchases (Chang et al, 2021), firms may utilize capital policies involving stock repurchases (such as recap CBs) to improve ROE (Nikkei, 2016;Tokyo Stock Exchange, 2017). We use the total amounts of dividend payments (DIV) and stock repurchases (REP) to identify these activities.…”

Stock Price Behaviour around the Announcement Date of Cash Dividend on the Indonesia Stock Exchange

“…The relationship between dividends and stock prices is also discussed in the irrelevance theory and signaling theory. The irrelevance theory introduced by Miller and Modigliani states that dividend payment must not have an impact on stock prices in a perfect market [15], even the distribution of dividends reduces the market value of the company [4] because it reduces assets and profits in the next time. In contrast, the signaling theory and the dividend puzzle indicate that dividend payments are likely to have a profound impact on the stock price [15].…”

“…A dividend indicates a company's financial health [25]. A dividend indicates the future company earning and management forecasting ability [4]. Each period the company distributes profits to owners.…”

“…The results of the research on the Hong Kong Stock Exchange show that dividend information is more favorable than earnings information [4]. However, there is an opinion that earnings information and earnings forecasts provide a strong signal regarding the prediction of company performance.…”