An Empirical Analysis of the Dynamic Relation among Investment, Earnings and Dividends

Managerial Finance, Volume 40, Number 2, p. 118-136, 2014

41 Pages Posted: 10 May 2017

See all articles by Richard A. DeFusco

Richard A. DeFusco

University of Nebraska at Lincoln - Department of Finance

Lee M. Dunham

Creighton University - College of Business Administration

John M. Geppert

University of Nebraska at Lincoln - Department of Finance

Date Written: April 1, 2013

Abstract

The authors use a firm-level vector autoregression (VAR) framework to examine the firm-level dynamics among investment, earnings and dividends. The firm-level VAR yields Granger causality results, impulse response functions, and variance decompositions characterizing the dynamics of these three variables at the firm level. For the average firm in our sample, Miller and Modigliani (1961) dividend policy irrelevance is not supported, even in the long-run; the shocks to dividends do have long-run consequences for investment and vice versa. Dividend changes are an ineffective signal of future earnings in both the short and long term. The cost of an increased dividend is on average an immediate decrease of $3 in investment for every dollar increase in dividends and the effect is persistent up to six years after the increase in dividends.

Keywords: Dividends, Investment, Granger Causality, Impulse Response, Variance Decomposition

JEL Classification: G11, G14

Suggested Citation

DeFusco, Richard A. and Dunham, Lee M. and Geppert, John M., An Empirical Analysis of the Dynamic Relation among Investment, Earnings and Dividends (April 1, 2013). Managerial Finance, Volume 40, Number 2, p. 118-136, 2014, Available at SSRN: https://ssrn.com/abstract=2965024

Richard A. DeFusco

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States
402-472-6763 (Phone)

Lee M. Dunham (Contact Author)

Creighton University - College of Business Administration ( email )

United States
(402) 280-2637 (Phone)

HOME PAGE: http://https://business.creighton.edu/faculty-directory-profile/433/lee-dunham

John M. Geppert

University of Nebraska at Lincoln - Department of Finance ( email )

229 CBA
Lincoln, NE 68588-0490
United States
(402) 472-3370 (Phone)

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