Attention to Dividends, Inattention to Earnings?

In frictionless markets dividends are irrelevant to firm value (Miller and Modigliani 1961), but in practice we propose that they affect valuation and stewardship, roles traditionally filled by accounting information. Using a variety of econometric methods to control for differences between dividend paying and non-dividend paying firms, we show weaker price and volume reactions to earnings announcements (EAs) for payers, consistent with investors using dividend information as a substitute for earnings information. We show the probability of just meeting or beating (missing) earnings estimates is lower (higher) for dividend payers relative to non-payers, consistent with managers responding to the decreased attention to earnings by engaging in less earnings management. Valuation tests show payers have lower earnings response coefficients and less persistent earnings surprises, consistent with the availability of a permanent earnings signal (i.e., the dividend) substituting for permanent earnings information otherwise extracted from EAs. Collectively, this evidence suggests dividends impact the information environment, and although costly, could be an efficient way for some firms to satisfy investors' demand for information