Information asymmetry, dividend increases, risk and expected future earnings changes

This paper examines the information content of dividend increases in a setting where firms face different levels of information asymmetry between management and investors. Specifically, I investigate whether and why stock market reactions to dividend increase announcements are greater for firms with lower analyst coverage. This study provides three sets of findings. First, the information content of dividend increases is greater for firms covered by fewer analysts. Second, stronger stock market reactions to dividend increases by firms with lower analyst coverage are due to both: (1) a stronger association between dividend increases and future earnings changes, and (2) greater declines in Fama and French (1993) three risk factor loadings. Finally, I find that prior studies mismatch the current dividend change year with the future earnings change year. After correcting for this misalignment, I show that dividend increases contain information regarding increases in future earnings and profitability. My findings generally hold using other measures of information asymmetry. Overall evidence suggests that managers facing greater information asymmetry signal their firms' true worth' through dividend increases.