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Corporate risk management and dividend signaling theory

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  • Dionne, Georges
  • Ouederni, Karima

Abstract

This 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.

Suggested Citation

  • Dionne, Georges & Ouederni, Karima, 2011. "Corporate risk management and dividend signaling theory," Finance Research Letters, Elsevier, vol. 8(4), pages 188-195.
    • Handle: RePEc:eee:finlet:v:8:y:2011:i:4:p:188-195
    DOI: 10.1016/j.frl.2011.05.002
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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.
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    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.
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    Cited by:

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    2. 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.
    3. 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).
    4. 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.
    5. 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.
    6. 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.

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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:

    • 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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