Corporate risk management and dividend signaling theory
AbstractThis article investigates the effect of corporate risk management on dividend policy. We extend the signaling framework of Bhattacharya [1979. Bell Journal of Economics 10, 259–270] by including the possibility of hedging the future cash flow. We find that the higher the hedging level, the lower the incremental dividend. This result is intuitive. It is in line with studies suggesting that cash flows’ predictability decreases the marginal gain from costly signaling through dividends and the assertion that corporate hedging decreases cash flow volatility. It is also in line with the purported positive relation between information asymmetry and dividend policy (e.g., Miller and Rock [1985. The Journal of Finance 40, 1031–1051]) and the assertion that risk management alleviates the information asymmetry problem (e.g., DaDalt et al. [2002. The Journal of Future Markets 22, 261–267]). Our theoretical model has testable implications.
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Bibliographic InfoArticle provided by Elsevier in its journal Finance Research Letters.
Volume (Year): 8 (2011)
Issue (Month): 4 ()
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Web page: http://www.elsevier.com/locate/frl
Signaling theory; Dividend policy; Risk management policy; Corporate hedging; Information asymmetry;
Other versions of this item:
- Georges Dionne & Karima Ouederni, 2010. "Corporate Risk Management and Dividend Signaling Theory," Cahiers de recherche 1008, CIRPEE.
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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