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The Information Content of Dividends: A Signalling Approach

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  • Bar-Yosef, Sasson
  • Huffman, Lucy

Abstract

The adoption of the incentive-signalling framework gives a reasonably good explanation of the corporate dividend decision. The equilibrium optimal dividend decision under such a framework is presented and analyzed, assuming a reward-penalty managerial incentive scheme is used. It is shown that the size of the declared dividend is an increasing function of expected cash flow. However, there exists a trend that points out that the higher the level of expected cash flow, the lower the marginal effects of cash flow on dividends. A similar relationship is observed with respect to changes in expected cash flows. These conclusions are in harmony with “real world†behavior as reported by several empirical studies. The effects of uncertainty and interest rates on dividends are also analyzed. It is shown, in agreement with observed phenomena, that the higher the uncertainty, the lower the dividend/payout ratio.

Suggested Citation

  • Bar-Yosef, Sasson & Huffman, Lucy, 1986. "The Information Content of Dividends: A Signalling Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(1), pages 47-58, March.
    • Handle: RePEc:cup:jfinqa:v:21:y:1986:i:01:p:47-58_01
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    Citations

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    Cited by:

    1. Mbodja Mougoué & Ramesh P. Rao, 2003. "The Information Signaling Hypothesis of Dividends: Evidence from Cointegration and Causality Tests," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 441-478, April.
    2. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    3. Herman Manakyan & Carolyn Carroll, 1990. "An Empirical Examination Of The Existence Of A Signaling Value Function For Dividends," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(3), pages 201-210, September.
    4. Boldin, Robert & Leggett, Keith, 1995. "Bank dividend policy as a signal of bank quality," Financial Services Review, Elsevier, vol. 4(1), pages 1-8.
    5. Eleni Gkeka & Kosmas Kosmidis & Georgios Simitsis, 2018. "The value relevance of dividend announcement: An empirical study of the Greek Stock Market," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 11(2), pages 44-50, September.
    6. Robert Joliet & Aline Muller, 2015. "Dividends and Foreign Performance Signaling," Multinational Finance Journal, Multinational Finance Journal, vol. 19(2), pages 77-107, June.
    7. Dialdin Osman & Elsaudi Mohammed, 2010. "Dividend Policy In Saudi Arabia," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 4(1), pages 99-113.
    8. Francisco Gonzalez Rodriguez, 1995. "La reacción de los precios de las acciones ante anuncios de dividendos: la evidencia empírica en el mercado español de valores," Investigaciones Economicas, Fundación SEPI, vol. 19(2), pages 249-268, May.
    9. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    10. Albert Eddy & Bruce Seifert, 1988. "Firm Size And Dividend Announcements," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 11(4), pages 295-302, December.
    11. Nakabayashi, Masaki, 2019. "Ownership structure and market efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 61(C), pages 189-212.

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