Analyst Coverage and Dividend Signaling

I examine whether firms with lower analyst coverage are more likely to be misvalued and if managers have greater incentive to signal firms' true quality by increasing dividends. This study provides three sets of findings. First, the information content of dividend increases is greater for firms covered by fewer analysts. Second, stronger stock market reactions to dividend increases by firms with lower analyst coverage are due to both: (1) a stronger association between dividend increases and future earnings changes, and (2) declines in Fama and French (1993) three risk factor loadings. My findings generally hold with other measures of information asymmetry. Finally, I find prior studies inappropriately annualize quarterly dividends, and thus, mismatch current dividend changes with future earnings changes. After correcting for this, I show that dividend increases contain information regarding increases in future earnings and profitability. Overall evidence suggests that managers facing greater information asymmetry try to signal their 'true worth' through dividend changes.