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Optimistic managers overestimate future earnings. If managers make dividends announcements based on their assessment of future earnings and investors cannot perfectly distinguish between optimistic and rational managers, then announcement returns are predicted to be on average higher for optimistic managers than for rational managers, controlling for the size of the dividend change. This prediction is tested using proxies for managerial optimism and found to be empirically supported. The results are not driven by agency problems, information asymmetries, or optimistic managers merely announcing bigger dividend changes. The results also provide a possible explanation for existing evidence that dividend changes generate abnormal price reactions, and yet provide little information about future earnings.
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