Do liquidity induced changes in aggregate dividendssignal aggregate future earnings growth?
D. Michael Long
Published online: 29 November 2008
Springer Science + Business Media, LLC 2007
Extant empirical literature does not provide abundant evidence for theinformation content hypothesis regarding firm-level dividend signaling. Althoughthis is consistent with the argument against an optimal firm-level dividend policy,this does not imply an absence of an optimal aggregate dividend level. Aggregatedividends and earnings may exhibit stronger associations if aggregation filters out firm-specific earnings information and indicates macroeconomic trends. Usingmacroeconomic data, we show that aggregate payout ratios signal aggregate futureearnings growth for horizons up to 4 years, and that excess aggregate liquidity playsan important role in this relationship.
In a recent survey of 384 financial executives, Brav et al. (2004) confirm Lintner
s(1956) observation that managers only increase dividends when strong earnings aresustainable in the future. However, extant empirical literature provides limitedevidence that dividend changes signal future earnings growth at the firm level. Nissim and Ziv (2001) find that dividend increases signal future abnormal profits.Conversely, Benartzi et al. (1997), and subsequently, Benartzi et al. (2003) find no
J Econ Finan (2009) 33:1
12DOI 10.1007/s12197-007-9020-4C. Wann (
D. M. LongDepartment of Finance, COB, University of Tennessee-Chattanooga,615 McCallie Avenue, Chattanooga, TN 37403, USAe-mail: Christi-Wann@utc.eduD. M. Longe-mail: Michael-Long@utc.edu