Theory of Signalling Dividends: An Economic Analysis

Posted: 27 Aug 2018

Date Written: February 16, 2018

Abstract

The dividend policy is one of the most debated topics in finance literature. Dividend announcements can contain information about the company’s future performance and hence, since decades many researches have argued that the dividend policy decisions of firms are very important mainly due to the signalling effect they have on the firms future performance. According to the dividend signalling hypothesis, dividend change announcements trigger share returns because they convey information about management’s assessment on firms’ future prospects. This paper begins by explaining certain concepts which are useful in understanding the theory at hand. It then moves on to studying the Theory of Signalling Dividends. Two hypotheses are formed and in order to explore them, an empirical case study is undertaken whereby the dividend announcements, divided rates, share prices, and profits of two companies listed on the Indian stock market are compared and analysed. This paper therefore attempts to analyse the theory of signalling dividends and to contribute positively to the understanding of the behaviour of Indian share prices in relation to dividend announcements.

Keywords: dividend policy, dividend, information asymmetry, profits

Suggested Citation

Bhargava, Shebani, Theory of Signalling Dividends: An Economic Analysis (February 16, 2018). Available at SSRN: https://ssrn.com/abstract=3233042

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