Question

What is the information content of dividend changes?

Answer 1

Simply put, the word on the street matters and no company likes to cut the divdend from their existing levels. Thus, it is belived that divdend increase decision is taken only when it is anticipated that future earning would increase to level to pay for the increased level of dividends. Therefore, whenever a dividend increase decision is announced the price of stock increase and reverse is also true.They might increase the dividend payout for a particular year.

But, the same thing has been argued basis the lack of evidence that dividend changes and future earnings move in the same direction. It is true that dividend increase in a particulat can be effected by various other things. Accounting Standards, generally don't allow to relaize the windfall gains. Company which had recieved windfall gains might decide to share it with shareholders. Like this, there can be numerous situation where dividend increase is not a signal of future increase of earnings.

Thus, it is argued that divdend change may signal other that companys' cash flows like change in risks.