Dividend Changes as Predictors of Future Profitability

Abstract

This study investigates “the information content of dividends hypothesis” using data on UK firms from 1990-2015. Dividends act as an important conveyor of information. Dividend changes may trigger changes in stock prices because they may convey new information about the firm’s future earnings and profitability. Why do companies pay dividends (or analogously why are stockholders interested in receiving dividends), given that it is well known that dividends are often taxed heavily? This question is of special interest in the UK, where the dividend tax is higher than the capital gain tax. Previous research has used a number of dividend policy theories to explain the dividend policy puzzle. We carry out several estimations and find out that contrary to some other studies, there is no evidence that dividend increases (decreases) provide information about the future profitability or earnings of UK firms.