The Effect of Dividend Increase on Future Earnings: Evidence from Nordic Countries between 2000 and 2015

Abstract: This master thesis contributes to the literature concerning the theoretical and empirical understanding of dividend’s change on company’s future earnings. The paper analyses if dividends have explanatory power over future earnings. Also, the analysis expects to provide more evidence of the relationship in Nordic region. This thesis is based on a quantitative study where we use a sample of 586 companies listed on OMX Nordic all-share index over the period between 2000 and 2015. The sample resulted in total of 7021 instances of dividend changes. In addition to using change in earnings as dependent variable, change in dividends as independent variable, this study uses eight control variables that affect the relationship between dividends and future earnings. This study finds that changes in dividends can explain next year’s downward dividend changes and two year’s after upward dividend changes. However, the coefficients of dividend changes are inconsistent with different specifications of regressions. Therefore, we conclude that dividends are a poor instrument to explain future earnings changes and should not be relied on when predicting company’s future earnings.