The accuracy of management dividend forecasts in Australia

Abstract

Dividends have important cash flow consequences for investors, either from the dividends themselves or via their implications for income and capital gains taxes both now and in the future Dividends are also important for signaling reasons Consequently, investors, analysts and managers frequently forecast future dividends and those forecasts are reported in various ways. Yet the accuracy of dividend forecasts, whether by " insiders" or "outsiders", seems to have been a neglected if not forgotten area of empirical finance. In a companion paper, we assess the accuracy of the consensus of individual analysts' dividend forecasts. In this paper, we examine the accuracy of management dividend forecasts in Australia. For this purpose, we use a sample of Australian IPO firms that provided dividend forecasts in their prospectuses. Our results show that management dividend forecasts, like their earnings counterparts, are optimistically biased. Part of this bias may be due to the special nature of an IPO sample, which limits the external validity of our findings Nevertheless, management dividend forecasts are more accurate and less biased than earnings forecasts. Differences in the forecast horizon, size of retained ownership and the predictability of the firm's earnings are among several important reasons why some dividend forecasts are more accurate than others.