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Corporate Risk Management and Dividend Signaling Theory

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  • Georges Dionne
  • Karima Ouederni

Abstract

This paper investigates the effect of corporate risk management on dividend policy. We extend the signaling framework of Bhattacharya (1979) 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 in line with the purpoted positive relation between information asymmetry and dividend policy (e.g., Miller and Rock, 1985) and the assertion that risk management alleviates the information asymmetry problem (e.g., DaDalt et al., 2002). Our theoretical model has testable implications.

Suggested Citation

  • Georges Dionne & Karima Ouederni, 2010. "Corporate Risk Management and Dividend Signaling Theory," Cahiers de recherche 1008, CIRPEE.
    • Handle: RePEc:lvl:lacicr:1008
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    References listed on IDEAS

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    1. Dionne, Georges & Garand, Martin, 2003. "Risk management determinants affecting firms' values in the gold mining industry: new empirical results," Economics Letters, Elsevier, vol. 79(1), pages 43-52, April.
    2. James Poterba, 2004. "Taxation and Corporate Payout Policy," American Economic Review, American Economic Association, vol. 94(2), pages 171-175, May.
    3. Joan Farre-Mensa & Roni Michaely & Martin Schmalz, 2014. "Payout Policy," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 75-134, December.
    4. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September.
    5. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 1.
    6. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    7. Gerald D. Gay & Jouahn Nam & Marian Turac, 2002. "How Firms Manage Risk: The Optimal Mix Of Linear And Non‐Linear Derivatives," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(4), pages 82-93, January.
    8. Peter Dadalt & Gerald D. Gay & Jouahn Nam, 2002. "Asymmetric information and corporate derivatives use," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(3), pages 241-267, March.
    9. Dennis Frestad, 2009. "Why Most Firms Choose Linear Hedging Strategies," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 32(2), pages 157-167, June.
    10. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 743-771.
    11. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    12. Dichev, Ilia D. & Tang, Vicki Wei, 2009. "Earnings volatility and earnings predictability," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 160-181, March.
    13. Pinghsun Huang & Harley E. Ryan & Roy A. Wiggins, 2007. "The Influence Of Firm‐ And Ceo‐Specific Characteristics On The Use Of Nonlinear Derivative Instruments," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 30(3), pages 415-436, September.
    14. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 2.
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    Cited by:

    1. J. Barry Lin & Christos Pantzalis & Jung Chul Park, 2017. "Corporate derivatives use policy and information environment," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 159-194, July.
    2. Koziol, Philipp, 2014. "Inflation and interest rate derivatives for FX risk management: Implications for exporting firms under real wealth," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(4), pages 459-472.
    3. Rosa Lombardi & Daniela Coluccia & Giuseppe Russo & Silvia Solimene, 2016. "Exploring Financial Risks from Corporate Disclosure: Evidence from Italian Listed Companies," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 7(1), pages 309-327, March.
    4. Choi, Young Mok & Park, Kunsu & Kim, Woo Sung, 2020. "Corporate hedging and dividend policy: An empirical study of Korean firms," Finance Research Letters, Elsevier, vol. 32(C).
    5. Mike Adams & Wei Jiang & Tianshu Ma, 2024. "CEO power, corporate risk management, and dividends: disentangling CEO managerial ability from entrenchment," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 683-717, February.
    6. Seong Mi Bae & Md. Abdul Kaium Masud & Jong Dae Kim, 2018. "A Cross-Country Investigation of Corporate Governance and Corporate Sustainability Disclosure: A Signaling Theory Perspective," Sustainability, MDPI, vol. 10(8), pages 1-16, July.

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    More about this item

    Keywords

    Signaling theory; Dividend policy; Risk management policy; Corporate hedging; Information asymmetry;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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