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Recommended Readings: Finance

 

Surprise! Higher Dividends= Higher Earnings Growth
by Robert D. Arnott and Clifford S. Asness | Financial Analysts Journal, January-February 2003 

Inc Some argue that low payout ratios are a strong positive signal for future growth. Unfortunately, this view is inconsistent with the historical evidence. The authors report that low payout ratios historically precede low earnings growth. This relationship is statistically strong and robust. The empirical facts conform to a world in which managers possess private information. This causes them to pay out a large share of earnings when they are optimistic that dividend cuts will not be necessary. And to pay out a small share when they are pessimistic, so that they can be confident of maintaining the dividend payouts. The facts also fit a world in which low payout ratios lead to, or come with, inefficient empire building and the funding of less than- ideal projects and investments, leading to poor subsequent growth. In contrast, high payout ratios lead to more carefully chosen projects.