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A.A. Lonie: University of Dundee, Dundee, UK
G. Abeyratna: University of Sri Jayewardenepura, Nugegoda, Sri Lanka, and
D.M. Power: University of Dundee, UK
C.D. Sinclair: University of Dundee, UK
ACKNOWLEDGMENT: The authors would like to thank Rob Gray, John Innes and George Stout for their helpful comments and suggestions on an earlier draft of this article.
Introduction
This article examines capital market reactions to a variety of combinationsof simultaneous dividend and earnings announcements by UK companies. These announcements are treated as signals which are emitted by the managers of companies in an uncertain economic environment characterized by informational asymmetry and interpreted as best they can by investors.
Our analysis focuses on two aspects of the dividend phenomenon:
- (1) We review the largely US-based substantive literature on the dividend announcement.
- (2) We investigate whether UK dividend announcements contain information which is additional to, or confirmatory of, earnings information, especially when the earnings information contains an element of "surprise" for investors. A key contribution of this article is therefore that we examine the consequence of the interaction of dividend and earnings signals which appear at the same time.
In practice an investment analyst who has been alerted to the possibility of a significant change in the long-run economic prospects of a company is likely to seek clues among actual or rumoured changes in top management and reported changes in corporate strategy, as well as restructuring, divestitures, acquisitions, etc. (Denis, 1990; Marsh, 1993). Although the importance of such considerations in share trading decisions may well be considerable, no attempt is made in this article to pursue company case study evidence.
Literature survey
The present analysis draws heavily on a well-established approach to the relationship between dividends and earnings that runs from Lintner (1956) and Miller and Modigliani (1961), through Pettit (1972; 1976), Aharony and Swary (1980) and Kane et al. (1984) to Easton (1991). It is, however, an intellectually fashionable approach in the sense that it is also inspired by the recent literature on interactive signals[1]. This study follows the convention adopted in many empirical studies of examining the effects on share prices of both dividend increases and dividend decreases (for example, Charest 1978; Eades et al., 1985; Jeong, 1992; Lang and Litzenberger, 1989; Laub, 1976;...