The Linkages between Dividends and Earnings

Abstract

Abstract The purpose of this paper is to empirically test the linkages between dividends and earnings. Using the Granger test of statistical causality, it is found that some firms use dividends for signaling, some follow a residual policy, and some firms simultaneously signal and follow a residual policy. Segmenting firms according to dividend policy, the results indicate that firms that follow a residual or signaling dividend policy tend to have a higher growth in asset turnover, but a lower growth in revenues. Signaling firms also tend to be smaller, have higher variability in revenues, and use less debt throught time.