Dividend theories do not offer any support to the issue of dividends. Some authors consider that the ability of paying dividends is connected with financial performance of a company; others argue that the information about dividends is irrelevant. Below several points of view are examined.
Aharony and Swary (1980) consider that dividends provide ambiguous information in comparison to earnings because they are almost at management’s discretion solely. Also, they stated that empirical assessment of the amount of dividends and earning is difficult because these two numbers are closely synchronized. Thus, these two signalling devices (dividends and earnings) do not convey the relevant information about the future performance of a company to the public (Aharony and Swary, 1980).
Asquith and Mullins (1983) present an empirical study of 168 firms that either paid the first dividend or initiated dividends after 10-year interruption. On the contrary to Aharony and Swary (1980), Asquith and Mullins (1983) stated that subsequent dividends make positive impact on the shareholders’ wealth. However, they agreed to the point that initial dividends do not significantly contribute to the shareholders’ wealth development. Asquith and Mullins (1983) argued that the role of dividend increase is underestimated in the current literature. They also outlined that the results of their study supported the assertion that both initial and subsequent dividends convey valuable information to investors.
According to Benartzi, Michaely and Thaler (1997), found limited support to the statement that dividends conveys information about the future earnings of a firm. Also, their findings showed that an increase in the amount of dividends paid does not mean an increase in the future earnings. The outcomes of the authors are consistent with the outcomes made by Aharony and Swary (1980). As well as Asquith and Mullins (1983), Benartzi, Michaely and Thaler (1997) investigated the difference between early and subsequent dividends. They found out that the firms that cut dividends during the year 0 are likely to experience significant increase in earnings during the subsequent year. On the contrary, the firms that increased dividends during the year 0 and -1 did not show earnings growth during the subsequent year.
As well as Benartzi, Michaely and Thaler (1997), Kwan (1981) questioned the statement regarding the relevance of dividends. Despite Kwan (1981) examined vast literature and found significant support to the opinion that the dividend information is not trivial, he paid more attention to the opposite statement and examined methodology offered by Watts who stated that relevance of dividend is questionable.
Together with Benartzi, Michaely and Thaler (1997), Pettit (1972) agreed to the point that dividend information does not bear any analytical meaning. Also, he stated that the information related dividend does not contribute to understanding of the future performance of the company. However, he stated that changes in dividend convey considerable information to the investors. Thus, the information related dividends for one year is irrelevant while the information compared to the previous years may reveal the necessary results.
Woolridge (1983) revealed two effects of dividends namely: wealth transfer and signalling effects. Based on the previous studies analysed, he also noticed that positive dividend change announcements produce positive changes in stock price and vice versa. Thus, he supported the opinion that the changes in dividends influence the changes in the stock price supporting the argument that dividend information is valuable.
As it can be seen from the studies analysed, the author did not reach consensus in the issue of relevance of the information related dividends. However, more support was found to the statement that the information related dividends is irrelevant.
Aharony, J. and Swary, I., 1980. Quarterly dividend and earnings announcements and
stockholders' returns: an empirical analysis. Journal of Finance, 35, pp. 1-12.
Asquith, P. and Mullins, D. W., 1983. The impact of initiating dividend payments on
shareholders' wealth. Journal of Business, 56, pp. 77-96.
Benartzi, S., Michaely, R., and Thaler, R., 1997. Do changes in dividends signal the future
or the past? Journal of Finance, 52, pp. 1007-1043.
Kwan, C. C. Y., 1981. Efficient market tests of the informational content of dividend
announcements: critique and extension. Journal of Financial and Quantitative
Analysis, 16, pp. 193-206.
Pettit, R.R., 1972. Dividend announcements, security performance and capital market
efficiency. Journal of Finance, 27, pp. 993-1007.
Woolridge, J.R., 1983. Dividend changes and security prices. Journal of Finance, 38,