Dividend Signaling Hypothesis Research Articles

Dividend payouts under a societal crisis: Financial constraints or signaling?

Dividend payouts of Chinese firms are typically flexible and unstable, and firms have leeway to change dividends in response to a crisis. Using this setting, we document that Chinese listed firms tend to decrease dividend payouts under the coronavirus crisis, supporting our financial constraints hypothesis instead of the alternative dividend signaling hypothesis. The baseline result is robust to a series of sensitivity checks. Underlying mechanism tests show that the negative effect of COVID-19 on dividend policies is enhanced in high-constrained groups compared to that in low-constrained groups. Further analysis of crisis-related factors reveals that the main result is enhanced when firms engage in international diversification, when firms have greater labor intensity and when firms are nonstate-owned.

배당공시가 주가에 미치는 영향에 관한 실증 연구

This paper investigates the effects of dividend announcements of culture contents companies on stock prices from the perspective of the dividend signaling hypothesis, focusing on the recent data from 2016 to 2021. The empirical tests reveal that, compared to the extant literature, stock price reactions surrounding the dividend date in the culture contents industry are negative rather than positive. In addition, these negative effects are observed even before the dividend announcement. These results suggest that the dividend signaling hypothesis in prior research does not hold in the culture contents industry, delivering important implications for decision making of firm managers and investors in this industry. We expect this paper to enhance understanding of the culture contents industry from a financial veiwpoint.

Using UK Data to Study the Effects of Dividends Announcements on Stock Market Returns

Using a sample of firms listed on the FTSE-350, this study examines the effects of dividends announcements on the London Stock Exchange (LSE) during the period from 1990 to 2019. We use the dividend-signalling hypothesis to test whether dividends announcements have any effects on stock returns. Our results suggest that dividend increase announcements have a positive effect on stock returns, and dividend decrease announcement reduce stock returns. On average, a dividend increase is estimated to increase stock returns by 6 basis points and a dividend decrease is estimated to reduce stock returns by the same amount. These findings are consistent with the dividend-signalling hypothesis.

Signaling Hypothesis and Size Anomaly in Indian Stock Market

The dividend signaling hypothesis means that dividend change announcements send signals to the market about its prospects. Market capitalization anomaly or size effect means small-cap stocks variances and returns are different than the large-cap stocks. The sample was tested for dividend change announcement, and the sample was divided into large, medium, and small sample sizes based on the market capitalization of the stocks to test the size effect. Event methodology market model used to calculate the abnormal returns on the dividend announcement day. We found that dividends send signals to the market, and the market reacts positively to the dividend change announcements on event day (Aharony and Swary 1980, Litzenberger and Ramaswamy 1982, Dhillon and Johnson 1994, Below and Johnson 1996), but results may vary with the size of the company. Small-cap companies' variances are higher than the large-cap and mid-cap companies, and also small-cap variances are not equal to other variances results similar to Wong (1989), Bandara and Samarakoon (2002), Sehgal and Tripathi (2006), and Switzer (2010). Finally, we concluded that the dividend signaling hypothesis and market capitalization or size effect anomaly exist in the Indian stock market

Are Emerging Markets Efficient? Evidence from Informational Content of Dividend Changes in Polish Stock Market

Purpose: The objective of this paper is to present the dividend signaling hypothesis, in particular, an empirical analysis of the relationship between the current changes in the level of a dividend paid (t0) and the future profitability of the companies. Design/Methodology/Approach: The dividend signaling hypothesis is empirically tested using the dynamic causality analysis based on the regression approach monitoring for expected earnings changes and past returns with a set of linear and non-linear controls. The conducted analyses comprised the domestic companies quoted on the Warsaw Stock Exchange, which paid dividends in 2001-2016. Findings: The empirical results confirm that in the audited period, dividend decisions bring some information about the current situation (t = 0) and future (t = 1, t = 2) of the analyzed companies. It is also worth noting that among the analyzed indicators, the gross profit ratio (PBT) referred either to the market value or the book value of equity was most often in the statistically significant analyzes. In general, our results confirm the validity of the signaling hypothesis in the case of continuation-growth and initiation of payments in the Polish capital market as in the developed market. Practical Implications: We can say that investors, based on signals coming out of dividends advertisements, may conclude the future-income potential of a given company. Originality/value: As mentioned, the gross profit ratio (PBT) referred either to the market value or the book value of equity was most often in the statistically significant analyses. Thus, it seems that, contrary to the adopted assumptions in the literature, gross profit (PBT) in dividend signaling is more important than net profit (E).

The dividend signaling hypothesis and the corporate life cycle

PurposeThis paper aims to examine the relationship between the dividend signaling hypothesis and a firm's life cycle.Design/methodology/approachThe authors use Dickinson's (2011) methodology to develop a proxy for the firm's stages in its life cycle and to examine the relationship between dividends and future earnings following a nonlinear setting.FindingsUsing a sample of US firms during the 2000–2014 period, the authors find that the signaling hypothesis can be dependent on firm-specific characteristics, such as life cycle stages. The authors report that the relationship between dividend changes and subsequent earnings changes is different for different life stages. They also find that changes in the amount of the dividend provide some information about future earnings, especially during the early (introductory and growth) stages. These results are consistent with the use of earnings or return on assets as the dependent variables in models of earnings expectations.Originality/valueThe authors believe that this is the first time that the dividend signaling hypothesis has been linked to the life cycle of the firm.

Dividend Signaling Hypothesis, Semi-strong form of Hypothesis and Market Capitalization Anomaly in Indian Stock Market

The dividend signaling hypothesis means that dividend change announcements send signals to the market about its prospects. Market capitalization anomaly or size effect means small-cap stocks variances and returns are different than the large-cap stocks. The sample was tested for dividend change announcement, and the sample was divided into large, medium, and small sample sizes based on the market capitalization of the stocks to test the size effect. Event methodology market model used to calculate the abnormal returns on the dividend announcement day. We found that dividends send signals to the market, and the market reacts positively to the dividend change announcements on event day (Aharony and Swary 1980, Litzenberger and Ramaswamy 1982, Dhillon and Johnson 1994, Below and Johnson 1996), but results may vary with the size of the company. Small-cap companies' variances are higher than the large-cap and mid-cap companies, and also small-cap variances are not equal to other variances results similar to Wong (1989), Bandara and Samarakoon (2002), Sehgal and Tripathi (2006), and Switzer (2010). Finally, we concluded that the dividend signaling hypothesis and market capitalization or size effect anomaly exist in the Indian stock market

Do dividends announcements signal future earnings changes for Jordanian firms?

PurposeThis study aims to examine the signalling hypothesis of dividends by testing empirically the market reaction to dividends announcements. Furthermore, this study aims to examine the information content of dividends announcements with respect to future earnings changes for a sample of Jordanian industrial firms over the period 2009 to 2015.Design/methodology/approachThe authors mainly used the event study methodology to examine the market reaction to dividend release announcements. The market model is used to generate the expected returns. Also, the t-test is used to examine the significance of the mean and cumulative abnormal return. Furthermore, a simultaneous-equation model developed by Nissim and Ziv (2001) and Grullon et al. (2005), applying the two-stage least squares (2SLS), is used to examine the relationship between dividends changes and future earnings changes.FindingsThe results reveal consistency with the limited extant empirical evidence for developing markets and provide some new insights for Jordanian listed firms that support the signalling hypothesis. In applying the event study methodology, the information content of dividends shows that there is a significant positive market reaction to dividends announcements. The study’s findings also present a strong relationship between dividends announcements and profitability in the year of announcements and the subsequent year, whereas this relationship does not exist in the second year. The findings show that there is value-relevance for dividends, suggest that investors recognize the signalling purpose and discern that dividends announcements are useful in predicting favourable and unfavourable future earnings in the short run (the same year and subsequent year) and also show that managers may use dividends to signal earnings prospects in anticipation of expected future market benefits.Research limitations/implicationsThe findings of this study could have significant policy implications. The support of a signalling effect implies an existence of information symmetry, at least theoretically, between management and investors. On the other side, this study could not reflect the levels of inside ownership or the existence of signalling substitutes even though these findings could have implications for Jordan’s existing corporate governance practices and firms’ disclosure environment. The results are specific to Jordan, but they do shed light on the generality of the rival models of dividend policy. Many of the structural characteristics of the capital market in Jordan are, however, also present in other emerging markets. The results from this study may, therefore, help provide the basis for comparative research both in the region and in other emerging markets.Practical implicationsThe support of the signalling effect implies the existence of information symmetries, at least theoretically, between management and investors. These findings could have implications for Jordan’s existing corporate governance practices and firms’ disclosure environment.Originality/valueThis paper contributes to the literature by providing a workable test for the dividend signalling hypothesis, applying a simultaneous-equation model that incorporates the market reaction to dividends announcements and future earnings changes. Moreover, this paper uses a recent data set of dividends announcements in Jordan. This study provides additional insight to support the signalling hypothesis in emerging markets. Overall, current and previous studies have focused typically on investigating dividend policy in developed markets, especially the US and European markets, although there has been limited analysis of dividends changes on earnings changes for developing markets.

Impacts of Dividend Announcement on Stock Price: An Empirical Study of the Vietnam Stock Market

The Vietnam stock market is a new market in which dividend taxes are higher than capital gains taxes, Vietnamese firms have a high state-ownership, a majority of dividends are paid by cash and there is significant inconsistency in dividend payouts. This paper investigates the effect of dividend increase announcements on stock price reactions. A total of 198 announcements for 101 companies listed on the HOSE market was investigated, the results indicated that announcements of dividend increase do not cause reactions in security prices. The obtained results support Black’s tax-based dividend signaling hypothesis about the condition for dividend announcements becoming market information when dividend taxes are higher than capital gains taxes. These findings of this study are also in line with other previous studies.

Capital market effects around dividend announcements: an analysis of the Berlin stock exchange in 1895

ABSTRACTThis study analyses share-price and trading effects around dividend announcements of firms listed on the Berlin Stock Exchange in 1895. Based on a sample of 166 firms, I find statistically and economically significant positive (negative) cumulative average abnormal returns following a positive (negative) dividend surprise. The positive price impact evolves in advance, while the price impact of negative surprises arises at the announcement date. Consistent with the dividend-signalling hypothesis, these effects are more pronounced for smaller firms and firms with lower financial reporting transparency. Furthermore, trading increases around announcements. The effect is negatively associated with a firm’s market value. These findings are consistent with a differential belief revision among individual investors.

Market reactions to dividends announcements and payouts. Empirical evidence from the Warsaw Stock Exchange

The main goal of this paper is the empirical examination of the Polish stock market reactions to dividend announcements and dividend payouts made by the companies listed on the Warsaw Stock Exchange (WSE). The research sample comprises 56 companies (WIG index constituents) that announced dividend payments and completed the payout during 2013. In the analysis, event study methodology is employed including either calculating abnormal returns and cumulative abnormal returns around the event day or testing their statistical significance using parametric and nonparametric tests. The average cross-sectional abnormal return calculated for the entire sample is found to be significant on the dividend announcement day (t = 0, 0.86%) and on one day after (t = 1, 0.59%) at the 1% and 10% significance levels, respectively. The outcomes of the analysis conducted within the three distinguished subsamples are rather more diverse. In the subgroup of the first announced dividends (or dividends announced after a minimum one-year break), the significant average abnormal return is found on day t = 1 (0.90%, 5% significance level), whereas in the case of the dividend decreases subsample, the significant average abnormal returns (at the 10% significance level) occur on days t = −4 (-1.44%) and t = 2 (-1.15%). The average abnormal return calculated within the subsample of dividend increases turns out to be positive and significant on day t = 1 (1.03%, 10% significance level). The results obtained for the average cumulative abnormal returns corroborate the findings reached for the average cross-sectional abnormal returns in the case of the first dividend and dividend increase subsamples. However, the average cross-sectional abnormal returns calculated within the eleven-day-long event window around the dividend payment day turn out to be statistically insignificant. The obtained results provide evidence that the Polish stock market reaction to dividend announcements is positive and immediate. However, the market does not significantly react to dividend payouts, which may lead to the conclusion that the WSE directly incorporates news on dividends into stock prices. Moreover, the reaction of the market for dividend announcements is consistent with the sign of the dividend change: dividend-increase (-decrease) announcements are interpreted as a positive (negative) signal by the investors. Such results support both the informational content of the dividend hypothesis and the dividend signaling hypothesis. Considering that the observed abnormal market behavior disappears within two days at most after the announcement date, the results of the study can be useful for financial practitioners only with regard to short-term investment decisions.

The Relationship Between Cumulative Abnormal Returns And Earnings: Evidence From Emerging Markets

This study examines the signaling hypothesis of dividends by testing empirically the market reaction to dividends announcements. Furthermore, this study examines the information content of dividends announcements with respect to future earnings changes for a sample of firms listed at Amman Stock Exchange (ASE) during the period 2005 to 2010. The sample consists of 183 observations and 132 observations for dividend release sample and no-dividend release sample, respectively. The Event Study Methodology (ESM) is applied to examine the market reaction to dividend release announcements. The market model is used to generate the expected returns. Also, the t-test is used to examine the significance of the mean and cumulative abnormal returns. Furthermore, a regression model is used to examine the signaling hypothesis. To test the information content of dividend changes on earnings prospects, we individually incorporate the linear model with CAR to form the model. The findings of the information content of dividends applying the ESM methodology show that there is a significant positive abnormal return on the announcement days. Also, it shows that there is an overreaction straight after the announcement day, then a correcting attempt in the post event and then it goes back to normal, which is consistent with the signaling hypothesis. For the no-dividend release sample, the results show no significant abnormal return on and around the announcement days which is again consistent with the signaling hypothesis. Our results are consistent with AlShattarat et al . (2012) suggestions that there could be value relevance for dividends rather than dividends' change. Also, the findings present a strong relationship between dividends announcements and the profitability mainly in the year of announcements and the subsequent year, whereas this relationship does not exist in the second year of announcements. The findings of this study could have significant policy implications for Jordan's existing corporate governance practices and firms' disclosure environment. The results are specific to Jordan, but they do shed light on the generality of the rival models of dividend policy.

Determinants of stock prices during dividend announcements: an evaluation of firms' variable effects in Nigeria's oil and gas sector

AbstractThe aim of this research was to analyse, statistically significant, quantitative variables that determine the share price of oil and gas sector companies listed on the Nigerian Stock exchange, during the economic slowdown period of 2009–2013, after the world financial crisis of 2008, and investigate whether the signalling hypothesis holds or not. In terms of analytical tools, multiple regression analysis is used. During dividend increase announcements, the regression coefficient determinant (R2) indicates that over 90 per cent of variations in stock prices is explained by variations in dividend announcements. This study supports the dividend signalling hypothesis (DSH) but discredits the efficient market hypothesis. During a dividend decrease, the R2 for both equations indicates that over 64 per cent of variations in stock prices is explained by variations in dividend announcements. This result also supports the DSH. The implication of this is that racketeers can capitalise on this and make unjustified returns. By so doing, both sector investors and the stock market will be short changed. As this research considers only the oil and gas sector, further studies need to be conducted that consider possibly all listed firms in the Nigerian stock market, within the same interval to further investigate if the signalling hypothesis will hold or not. But most appropriately, applicable, as a comparative study of the same sector before and after the world financial crisis of 2008 the paper seeks to find out if this phenomenon is also applicable to OPEC member states. This research is in progress.

Signalling power of cash dividend announcements and risk: evidence from India

An increasingly important issue in the study of financial markets is to understand the causes of the apparent abnormal equity price drifts or anomalies that are shown to follow various types of corporate events. This issue has been addressed in this paper in context of cash dividend announcements. The objective of this paper is to examine the impact of the announcement of 'pure' cash dividends on stock market returns and associated risk (if any) using the 'Event Study Methodology'. The sample consists of the Bombay Stock Exchange (BSE) 500 index non-finance companies. The period of the study is 2003-2013. Cash dividend announcements have information content to effect a change in prices leading to positive average abnormal returns. The findings lend support to dividend signalling hypothesis for the sample companies.

The Impact of Dividend Omission Announcement on Market Price of Manufacturing Companies: A Study on Dhaka Stock Exchange (DSE)

The dividend policy is one of the most debated topics in the finance literature. According to the dividend signaling hypothesis, dividend change announcements trigger share returns because they convey information about firm's future prospect. This paper focuses on the empirical analysis of the dividend signaling hypothesis and investigates the announcement effect of dividend changes. The study aims to examine the stock return behavior around the dividend announcement in Dhaka Stock Exchange. The event study methodology is used for this study. The abnormal return and cumulative abnormal return are calculated with market adjusted model. The event window is 30 days. The abnormal return and cumulative abnormal return are evaluated for significance using t-test. The findings of the study reveal that the reaction of stock prices to dividend omission announcement is statistically significant. The evidence tends to support the dividend signaling hypothesis that the bad news message affects the market negatively.

FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE

According the dividend signalling hypothesis, it is expected a positive relationship between dividend change announcements and the subsequent share price reactions. However, empirical results are not consensual. This study investigates whether firm-specific factors contribute to explain a negative market reaction to dividend change announcements, contributing to the scarce analysis of firm-specific factors explaining the inverse share price reaction to dividend change announcements. The study applies the panel data approach to three European markets. The results show that the market reaction to dividend change announcements is negatively associated with the firm size. We find that the negative market reaction to dividend increase announcements is associated with firms that have, on average, lower dividend changes and higher growth opportunities. Moreover, the results suggest that a high percentage of dividend negative changes, decreases the likelihood that the market reacts positively to a dividend decrease announcement. Globally, we find some evidence for the dividend signalling hypothesis.

Do firms use dividend changes to signal future profitability? A simultaneous equation analysis

This paper retests the signaling hypothesis of dividends by examining whether managers change dividends to signal their expectation of earnings prospects using a simultaneous-equation approach. This approach allows us to more clearly test the earnings prospects signaling hypothesis and facilitates the control of several alternative motives that managers may have for changing dividends. We also examine the information content of dividend changes with respect to future earnings changes in the same model system. Our results show that managers change dividends to signal equity-scaled rather than asset-scaled earnings prospects. In addition, we find evidence that managers also change dividends for signaling previous earnings changes and for catering to dividend clienteles. As for the information content of dividend changes, we find that dividend changes have significant and negative impact on ROA changes. The findings suggest that if investors consistently cannot recognize the signaling purpose and find that dividend increases (decreases) are not useful in predicting favorable (unfavorable) future earnings, managers may someday give up using dividend changes to signal the earnings prospects of their firms because they cannot obtain the expected market benefits anymore.

Dividend Signalling Hypothesis In Emerging Markets: More Empirical Evidence

The main objective of this study is to examine empirically the signalling theory for a sample of firms listed at Amman Stock Exchange (ASE) during the period 2005 to 2010. The sample consists of 183 observations and 132 observations for dividend release sample and no-dividend release sample, respectively. Event Study Methodology (ESM) is applied to examine the market reaction to dividend release announcements. The market model is used to generate the expected returns. Also, the t-test is used to examine the significance of the mean and cumulative abnormal returns. Results from the dividend release sample shows that there is a significant positive abnormal return on the announcement days. Also, it shows that there is an overreaction straight after the announcement day, then a correcting attempt in the post event and then it goes back to normal, which is consistent with the signalling hypothesis. For the no-dividend release sample, the results show no significant abnormal return on and around the announcement days which is again consistent with the signalling hypothesis. Our results are consistent with Al-Shattarat et al. (2012) suggestions that there could be value relevance for dividends rather than dividends change. Our findings show that there is value relevance for dividends and thus supporting the signalling hypothesis.

Does Dividend Signaling Hypothesis Still Relevant? Evidence from Malaysian Main Market

Does Dividend Signaling Hypothesis Still Relevant? Evidence from Malaysian Main Market

A Discussion on the Signaling Hypothesis of Dividend Policy

This paper discusses the signaling hypothesis of corporate dividend policy. We discuss this traditionally important matter in the field of corporate finance by introducing both classic and newest related studies. There seem to be some general agreements on the dividend-signaling hypothesis; however, our discussions include the following new viewpoints. First is the possibility of the firm risk changes after dividend policy changes. Second is the linkage between market efficiency and dividend policy. Third is the reality of dividend policy changes as signals by corporate managers. We consider that our many-sided discussions on the dividend-signaling hypothesis with reviewing both classic and newest literature contribute to theoretical and empirical future related research in this field.