Dividend initiations and earnings surprises

This paper examines the performance of newly public firms and compares those firms that initiated dividends with those that did not. Earnings increases following the dividend initiation and earnings surprises for initiating firms are more favorable than those for noninitiating firms. Furthermore, had noninitiating firms declared dividends that matched the dividend yield, dividend-to-sales ratio, or dividend-to-assets ratio of initiating firms, the promised dividend would have equaled about 8.5% of earnings, significantly above the 0.05 level for initiating firms. In contrast to DeAngelo, DeAngelo, and Skinner (1996), these results suggest that dividends signal differences in performance between otherwise comparable firms.