Do dividends convey information about future earnings?

Yes. We find that dividend changes predict future unexpected earnings changes in each of the next four quarters. These earnings impacts are persistent, leading to higher than expected earnings levels for at least three years after the dividend change. These results are robust to various measures of expected earnings, including analyst forecasts and a flexible function of past earnings and returns. Second, dividend announcements convey this earnings information to investors. Market reactions to dividend changes are positively related to future earnings changes, and analysts revise their forecasts after the dividend change to completely correct their previous errors. We further find the information content of dividends is larger for dividend cuts, relative to increases, and when information asymmetry is higher. Our study differs from prior research, which finds either no evidence of information content or only short-horizon information content, in that we use quarterly data to delineate earnings announced before and after the dividend change.