We examine whether the market interprets changes in dividends as a signal about the persistence of past earnings changes. Prior to observing this signal, investors may believe that past earnings changes are not necessarily indicative of future earnings levels. We empirically investigate whether a change in dividends alters investors' assessments about the valuation implications of past earnings. Results confirm the hypothesis that changes in dividends cause investors to revise their expectations about the persistence of past earnings changes. This effect varies predictably with the magnitude of the dividend change and the sign of the past earnings change. THIS STUDY EXAMINES THE ROLE OF CHANGES in dividends in informing investorsabout the persistence of past earnings changes. The persistence of earnings is the extent to which an unexpected change in earnings revises expectations of future earnings (for one or more periods) in the same direction as the unexpected change. Prior theory and evidence suggest that highly persistent changes in earnings are more indicative of changes in firm value than less persistent changes in earnings. 1 However, prior research also suggests that investors are initially unable to discern the persistence of earnings following an earnings announcement. This uncertainty about the persistence of earnings is resolved as later earnings announcements for subsequent quarters provide additional information. 2 Changes in dividends may also play a role in revising investors' assessments of the persistence of past earnings because managers are reluctant to increase (decrease) dividends unless earnings increases (decreases) are persistent. We investigate whether investors interpret a change in dividends as a signal about the persistence of past earnings changes by examining the * Both authors are with Carnegie Mellon University. We are grateful for the helpful comments of Douglas Diamond (the editor), an anonymous referee,

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We examine how management quarterly guidance strategy is affected by various outcomes from previously issued guidance. We find that managers are less likely to provide quarterly earnings guidance for a given year when past management forecasts have been overly optimistic, when past forecasts were unsuccessful at influencing analysts’ expectations, when past forecasts failed to reduce information asymmetry, and when past forecasts resulted in earnings disappointments. For firms that continue to give guidance, adverse prior outcomes also affect the precision of future guidance and the number of quarters within a year for which they give guidance.

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SYNOPSIS: We summarize the empirical evidence regarding Regulation Fair Disclosure (FD) to gauge whether the regulation achieves its stated objectives and to provide insights and direction for future research. Overall, we find that FD's prohibition against the selective disclosure of material information eliminates the information advantage enjoyed by certain investors and analysts and thereby provides a more level playing field for all investors. In addition, a number of firms respond to FD by expanding public disclosures, and the information environment of the average firm does not appear to be adversely affected. However, we find that an unintended consequence of FD is a reduction in the total amount of information available in the market (i.e., a “chilling effect”) for small or high-technology firms. Finally, ongoing research suggests that private access to management continues to provide select analysts or investors with non-material information used to complete the “mosaic” of information.