The Research On The Relationship Between Cash Dividend Policy And Earnings Volatility

The research of signaling hypothesis indicates that dividend policy conveys theearning information of listed companies. The research of domestic scholars shows thatsignaling hypothesis isn’t completely applicable in Chinese capital market whilemanagements are learning to make cash dividend correctly. Research indicates thatthe change of cash dividend wouldn’t tell us the trend of company’s performance inthe next year. Other research indicates that company’s earning ability and continuitywill be improved if it pays cash dividend. Moreover, research indicates that thereexists a significantly positive correlation between the volatility of earning and stockprice of listed companies when it pays cash dividend constantly. Therefore, cashdividend policy can tell us something about company’s future earning informationalthough it couldn’t perform perfectly.This paper indicates that cash dividend conveys the listed companies’ futureinformation of earning volatility which certificates that the management is moreconfident about future earnings. Cash dividend is an effective way to predict earningvolatility of company’s future performance. According the sample of Shanghai andShenzhen A share market from2001to2010, there is a significant negativecorrelation between cash dividend and companies’ future earnings volatility, whichindicates that cash dividend are based on the future relatively stable earningexpectation. Cash dividend is an effective method as debt ratio and B/M to judge thelisted companies’ future earnings volatility. Moreover, consistent cash dividendindicates the management is more confident about future earnings. Therefore, stockprice of listed companies that paid consistent cash dividend are more stable. In thelast, this paper researches the relationship of pure cash dividend and earning volatilityin order to avoid the interference of stock dividend. The result is the same to theformer regression, except a failure regression in2001which is involved in theregulation. Furthermore, consistent pure cash dividend is a more effective way tojudge the earning volatility.Research indicates that cash dividend is a predictive accounting tool to show themanagement’s confidence, which reduces the information asymmetry. Cash dividendis crucial to cultivating investors’ value investment idea. Investors are paid by cashdividend, which weakens the expectation that investors just benefit from price changeonly and reduces the excessive trading. Eventually, investors are more rational andthen focus on companies fundamental. Naturally, the market efficient is improved.