Confirming Dividend Changes and the Non-Monotonic Investor Revision of Earnings Persistence

It was big news and simultaneously signified a turning point when the most valuable company of the world decided on a historic change in its cash policy. On the 19^th of March 2012 Tim Cook, Apple Incorporation’s designated Chief Executive Officer (CEO) since August 2011, announced the recommencement of quarterly cash dividend distributions to the investment community – after an abstinence of 17 years. The news was very well received by the market, since Apple’s share price increased by two percent in the premarket. Furthermore, Apple’s decision was accompanied by positive comments from financial analysts and investors. “Individual investors are eager to get a slice of Apple dividend pie”, titled the Los Angeles Times.

Why do firms pay dividends? Why do investors like dividend payments? After 50 years of research, there is still no comprehensive answer to these questions. It is not that scholars are apathetic in resolving these issues. Instead, there has been a plethora of promising theoretical explanations, but the empirical evidence does not yield a clear picture, so that dividends still remain an enigma. The rocky road to finding an adequate answer is reflected in Fischer Black’s comment: “The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit together.” Even after 20 years of comprehensive research, Allen, Bernardo and Welch (2000) conclude that “dividends remain one of the thorniest puzzles in corporate finance.”

The following, comprehensive theoretical analysis on the economic relevance of dividend changes in conveying information about earnings persistence is based on my research study which has been presented at the 2010 American Accounting Association Annual Meeting in San Francisco, USA, at the 34 ^th Annual Congress of the European Accounting Association in Rome, Italy and at the 7 ^th Accounting Research Workshop in Fribourg, Switzerland.

The following empirical analysis corresponds, essentially, to the empirical part of my research study whose hypothesis development has been extensively discussed in Chapter 3.

“Although a number of theories have been put forward in the literature to explain their pervasive presence, dividends remain one of the thorniest puzzles in corporate finance.” This doctoral thesis contributes to the vast academic literature intended to disentangle one of the most prominent academic puzzles. In this respect, my work adds a further piece to the dividend conundrum. While not casting doubt on the evident existence of dividends, I analyze the economic relevance of dividend changes in conveying information about earnings persistence to investors. Specifically, I contribute to recent evidence that dividends inform usefully about the characteristics of a firm’s earnings. That is, a dividend change which supplements a contemporary earnings innovation with the same sign contains useful information about the persistence of the current earnings change.

The time line between the board’s decision to commit to a dividend payment and the final cash disbursement to the shareholders is characterized by specific dividend dates which are illustrated in Figure 8. Firstly, during the internal board of directors meeting management decides to pay out a dividend to the shareholders. Subsequently, at the dividend announcement date the board addresses the public and announces their dividend commitment as well as the size of the declared dividend. After the dividend announcement date the share is traded with the right to receive the upcoming dividend included. The ex-dividend date establishes the final point in time until after the right to receive the dividend expires. Two business days after the ex-dividend date, at the dividend record date, all shareholders who are entitled to the dividend have been recorded. Finally, about two weeks after the shareholder record date the dividend checks are mailed to all recorded shareholders at the dividend payment date.