Dennis T. Officer

Changes in dividend policy and subsequent earnings

56 ividend policy signaling models suggest 2 I g ?’ a positive relationship among changes in dividend policy,, risk-adjusted excess returns at the announcement of the change, and subsequent changes in the growth of quarterly earnings per share. This study focuses on changes in subsequent earnings per share performance in an examination of the postsignal performance of firms that initiate, resume, change, or eliminate a cash dividend following a long period of stability.’ Most previous signaling studies test for excess returns on announcement of a dividend policy change, presuming that the changes in policy are followed by changes in performance. Here we test the hypothesis that dividend increases (decreases) are followed by improvement (deterioration) in the growth rate 0 1 quarterly earnings. We also test the ability of the market to differentiate firms that experience improvement in earnings growth from firms that experience deterioration in earnings growth. We begin with a review of the limited empirical evidence on the relationship between dividend changes and subsequent earnings. The next section describes the sample, the test method employed, and the results. The final section summarizes the findings.