The Association of Stock Distribution Announcements and Earnings Performance

Abstract

This paper analyzes the association of unexpected earnings with stock dividend and stock split announcements. Unexpected earnings are modeled as the percentage deviation of actual earnings from expected. Value Line's earnings forecasts are used as a surrogate for the market's timely expectation of future earnings. The primary findings are: (1) postdistribution earnings realizations are greater than expected; and (2) deviations of realized earnings from expected are (a) directly related to the size of the stock distribution and (b) inversely related to the level of market anticipation of the event. Further, distribution size may be a proxy for market anticipation in that small distributions (stock dividends) are dominated by anticipated events and large distributions (stock splits) by unanticipated events. These findings are robust across samples that control for large measurement error due to small levels of forecasted earnings, and event contamination due to the simultaneous announcement of firm-related events. Examination of analysts' forecasts immediately following the event indicates a significant upward revision in earnings expectations. This finding, coupled with an analysis of a control sample of Value Line earnings forecasts, indicates that the observed unexpected earnings are not the result of systematic Value Line forecast error. Therefore, the paper provides support for the notion that stock distribution announcements convey future earnings information.