Melbourne Accounting Research Seminar - Professor Somnath Das

Professor Somnath Das from the University of Illinois presented a MARS seminar.

Topic: Analysts’ Forecast Errors and the Dividend Displacement Property

Abstract: The dividend displacement property suggests that current dividends mechanically reduce future earnings. This paper empirically examines whether analysts’ earnings forecasts fully capture dividend displacement (Penman and Sougiannis 1997; Ohlson 1995, 2001). We motivate our empirical tests based on a simple theory and use a robust estimation approach (Theil-Sen) to examine whether there is a systematic relationship between sell-side analysts’ earnings forecast errors and past dividends. Our results suggest that analysts’ earnings forecasts do not fully incorporate dividend displacement. Consistent with our predictions, these results are more (less) pronounced among firms with high (low) cost of capital, high (low) investment opportunities, and increasing (stable) dividends.