The Interactive Effect between Earnings and Dividend Announcements: Complement or Substitute?

This paper investigates the relative strengths of complementary and substitution effects between earnings and dividend announcements on a sequential sample of announcements of earnings and dividends from U.S. firms. The empirical results support the complementary hypothesis for earnings announcements that precede dividend announcements. Specifically, when evaluating an unexpected dividend signal, the investors tend to consult prior earnings information and react positively. Further tests find this complementary correlation to be stronger when accompanying negative, unexpected dividend signals. In contrast, I do not find complementary or substitution effects between dividend announcements that precede earnings announcements. In addition, the evidence indicates significant information content for unexpected revenue after controlling for unexpected earnings and dividends.