The Impact of Losses and Cash Flows on Dividends: Empirical Evidence for Japan

Abstract

The article's purpose is to examine the impact of cash flows, earnings, and losses in setting dividend policy in Japan. More specifically, i) earnings, cash flows and annual losses are posited to be associated with dividend changes in firms with established earnings and dividend records; and ii) dividend reductions, current operating earnings and cash flows have information content in predicting future earnings. The results here support these hypotheses. Moreover, annual losses are shown to be a necessary but not a sufficient condition for dividend reductions in firms with established earnings and dividend records. About 80% of the 191 Japanese firms that reported losses during the period 1990-94 reduced or omitted dividends. In contrast, only 16% of the 338 firms that did not report losses during the same period reduced dividends.