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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.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1008.

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Date of creation: 2010
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Handle: RePEc:lvl:lacicr:1008

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Keywords: Signaling theory; Dividend policy; Risk management policy; Corporate hedging; Information asymmetry;

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  1. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
  2. 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.
  3. 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.
  4. James Poterba, 2004. "Taxation and Corporate Payout Policy," NBER Working Papers 10321, National Bureau of Economic Research, Inc.
  5. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 743-71.
  6. Alon Brav & John R. Graham & Campbell R. Harvey & Roni Michaely, 2003. "Payout Policy in the 21st Century," NBER Working Papers 9657, National Bureau of Economic Research, Inc.
  7. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Franklin Allen & Roni Michaely, 2002. "Payout Policy," Center for Financial Institutions Working Papers 01-21, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Allen, Franklin & Michaely, Roni, 2003. "Payout policy," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429 Elsevier.
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