Dividend Changes and Managers' Expectations of Future Earnings: A Re-examination of the Information Content of Dividends

We re-examine the information content of dividends. Existing empirical research has consistently failed to document that dividend changes are followed by earnings changes of the same signs. We argue that dividend changes are informative about managerial private beliefs, at a minimum. Using four different proxies based on management earnings forecasts to capture managers' private beliefs with regard to future earnings; we find strong, consistent evidence that dividend changes are positively associated with managerial private beliefs about future earnings of the same sign. Assuming perfect foresight and using future actual realized earnings to proxy for new managerial beliefs yields similar evidence.