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Financial Signalling by Committing to Cash Outflows

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  • Ravid, S. Abraham
  • Sarig, Oded H.

Abstract

We analyze a model in which firms signal their quality by using financial policies to commit to cash outflows. Two financial policies may be used: dividend and debt-service obligations. We find sufficient conditions for the informational equilibrium to entail concommitant use of both dividends and leverage in the cost-minimizing combination of the commitment signal. In this equilibrium, better firms pay higher dividends and are more highly levered than lower quality firms.

Suggested Citation

  • Ravid, S. Abraham & Sarig, Oded H., 1991. "Financial Signalling by Committing to Cash Outflows," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(2), pages 165-180, June.
    • Handle: RePEc:cup:jfinqa:v:26:y:1991:i:02:p:165-180_00
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    1. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    2. Mai, Nhat Chi, 2016. "The Influence Of Macroeconomic Announcements Into Vietnamese Stock Market Volatility," OSF Preprints ydmhx, Center for Open Science.
    3. Fabrizio Zerbini, 2017. "CSR Initiatives as Market Signals: A Review and Research Agenda," Journal of Business Ethics, Springer, vol. 146(1), pages 1-23, November.
    4. Matthew Spiegel & S. Ravid, 1998. "Optimal Financial Contracts for a Start-Up with Unlimited Operating Discretion," Yale School of Management Working Papers ysm77, Yale School of Management, revised 01 Aug 2000.
    5. Ksenija Denčić-Mihajlov & Dejan Malinić & Konrad Grabiński, 2015. "Capital structure and liquidity during the financial crisis in Serbia: implications for the sustainability of the economy," Post-Communist Economies, Taylor & Francis Journals, vol. 27(1), pages 91-105, March.
    6. Shenoy, Catherine & Koch, Paul D., 1996. "The firm's leverage-cash flow relationship," Journal of Empirical Finance, Elsevier, vol. 2(4), pages 307-331, February.
    7. Fitriya Fauzi & Dani Foo & Abdul Basyith, 2017. "Islamic Bond Announcement: Is There Any Effect on Returns?," Global Business Review, International Management Institute, vol. 18(2), pages 327-347, April.
    8. Zhao, Jianmei & Katchova, Ani L. & Barry, Peter J., 2004. "Testing The Pecking Order Theory And The Signaling Theory For Farm Businesses," 2004 Annual meeting, August 1-4, Denver, CO 20215, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. Alejandro Vargas Sanchez, 2014. "Estructura de capital óptima en presencia de costos de dificultades financieras," Investigación & Desarrollo 0214, Universidad Privada Boliviana, revised Jan 2014.
    10. Cooper, Ian A. & Lambertides, Neophytos, 2018. "Large dividend increases and leverage," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 17-33.
    11. 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.
    12. Moradi, Masoud & Dass, Mayukh & Kumar, Piyush, 2023. "Differential effects of analytical versus emotional rhetorical style on review helpfulness," Journal of Business Research, Elsevier, vol. 154(C).
    13. Douglas, Alan V. S., 2001. "Managerial replacement and corporate financial policy with endogenous manager-specific value," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 25-52, March.
    14. Trojanowski, G., 2004. "Ownership structure as a mechanism of corporate governance," Other publications TiSEM 5dbc874d-d1d0-44a5-9717-8, Tilburg University, School of Economics and Management.
    15. Abraham, Mathew & Marsden, Alastair & Poskitt, Russell, 2015. "Determinants of a firm's decision to utilize a dividend reinvestment plan and shareholder participation rates: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 31(C), pages 57-77.
    16. M. Ameziane Lasfer, 1997. "On the Motivation for Paying Scrip Dividends," Financial Management, Financial Management Association, vol. 26(1), Spring.
    17. Muhammad Azeem Qureshi, 2009. "Does pecking order theory explain leverage behaviour in Pakistan?," Applied Financial Economics, Taylor & Francis Journals, vol. 19(17), pages 1365-1370.
    18. Gabrielle Wanzenried, 2002. "Signaling with Capital Structure Revisited," Diskussionsschriften dp0214, Universitaet Bern, Departement Volkswirtschaft.

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