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Predicting future earnings growth: a test of the dividend payout ratio in the Australian market

journal contribution
posted on 2010-01-01, 00:00 authored by A Flint, A Tan, Gang Tian
This paper examines the use of the payout ratio as a predictor of a firm’s future earnings growth. Recent evidence rejects the hypothesis that firm which retain a large portion of their earnings have strong future earnings growth. Higher dividend payout ratios instead correspond to higher future earnings growth. Examining both listed and delisted firms on the Australian stock exchange over the period 1989 to 2008, we provide further evidence that the dividend payout ratio is positively linked to future earnings growth. The results hold over both one, three and five year periods. Furthermore, our results rejected claims that such a relationship was caused by simple mean reversion in earnings. We find no evidence to support the cash flow signaling and free cash flow hypotheses as an explanation for this relationship.

History

Journal

International journal of business and finance research

Volume

4

Article number

2

Pagination

43 - 58

Publisher

Institute for Business and Finance Research

Location

Hilo, Hawaii

ISSN

1931-0269

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal; C Journal article

Copyright notice

2010, Institute for Business and Finance Research

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