Earnings and dividends

• Main Authors: Ang, Boon Heng, Kat, Poh Choo, Lim, May Yee
• Other Authors: Nanyang Business School
• Format: Final Year Project
• Language: English
• Published: 2013
• Subjects: DRNTU::Business::Accounting
• Online Access: http://hdl.handle.net/10356/51468
• Institution: Nanyang Technological University

Dividends and dividend-related matters are much researched finance topics. This study seeks to examine whether earnings are correlated to dividend changes as well as whether dividend changes have informational content. Lintner (1956) found that a firm’s bottom line net income is the key determinant of dividend changes. His model suggests that the change in dividends of a firm is a function of its current earnings and the previous year’s dividends. Past studies that have been done in Singapore on Lintner’s model have been conflicting. Thus, to give a clearer insight into this issue, the implications of Lintner’s model (1956) in Singapore will be tested together with an analysis of whether DeAngelo et al. (1992)’s findings hold in Singapore. From our sample of 167 firms listed on the Stock Exchange of Singapore, we concluded that Lintner’s model does apply in Singapore to a certain extent, that is, earnings do affect dividend changes in Singapore. However, the model only applies to the dividend reduction decisions of non-loss firms where both the level of net income and the change in net income affect their decisions. On the other hand, these two factors are irrelevant to the dividend reduction decisions of loss firms. The loss firms reduce their dividends primarily because of their loss. These results support Lee Chee Yeng (1968)’s assertion that Lintner’s hypothesis is too simplified. In addition, our study also concludes that the predictive power of dividend reductions on future earnings in Singapore is present. Hence, our findings are consistent with Miller and Modigliani (1961)’s “information content of dividends” hypothesis where the ability of current earnings to predict future earnings is significantly improved with the knowledge that a firm has reduced dividends.