Do Dividends Signal More Earnings? A Theoretical Analysis

25 Pages Posted: 30 Sep 2013

See all articles by Aloisio Araujo

Aloisio Araujo

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Humberto Moreira

Fundacao Getulio Vargas (FGV)

Marcos H. Tsuchida

Getulio Vargas Foundation (FGV)

Date Written: January 24, 2011

Abstract

Signaling models contributed to the corporate finance literature by formalizing "the informational content of dividends" hypothesis. However, these models are under criticism as the empirical literature found weak evidences supporting a central prediction: the positive relationship between changes in dividends and changes in earnings. We claim that the failure to verify this prediction does not invalidate the signaling approach. The models developed up to now assume or derive utility functions with the single-crossing property. We show that, in the absence of this property, signaling is possible, and changes in dividends and changes in earnings can be positively or negatively related.

Keywords: Dividend policy, Non-monotone contracts, Signaling, Single-crossing property

JEL Classification: C72, D82, G35

Suggested Citation

Araujo, Aloisio and Moreira, Humberto and Tsuchida, Marcos H., Do Dividends Signal More Earnings? A Theoretical Analysis (January 24, 2011). Journal of Financial Intermediation, Vol. 20, No. 1, 2011, Available at SSRN: https://ssrn.com/abstract=2330466

Aloisio Araujo (Contact Author)

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Humberto Moreira

Fundacao Getulio Vargas (FGV) ( email )

R. Dr. Neto de Araujo 320 cj 1307
Rio de Janeiro, Rio de Janeiro 22250-900
Brazil

Marcos H. Tsuchida

Getulio Vargas Foundation (FGV) ( email )

R. Dr. Neto de Araujo 320 cj 1307
Rio de Janeiro, Rio de Janeiro 22250-900
Brazil

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