Do dividends signal more earnings? a theoretical analysis

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2003-02
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The signaling models have contributed to the literature of corporate finance by the formalization of 'the informational content of dividends hypothesis'. However, these models are under criticism of empirical works, as weak evidences were found supporting one of the main predictions: the positive relation between changes in dividends and changes in earnings. We claim that the failure to verify this prediction does not invalidate the signaling approach. The mo deIs developed up to now assume or derive utility functions with the single-crossing property. We show that signaling is possible in the absence of this property and, in this case, changes in dividend and changes in earnings can be positively or negatively related.


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