Dividend signalling in the UK market
The main aim of this paper is to examine the relationship between changes in dividend payout, earnings and share price movement, and to evaluate the joint effects of earnings and dividend changes. Managers of a firm usually have more information about the firm's prospects than its shareholders; for example, they may know of deals about to be struck or of new senior appointments about to be made. Since this information cannot be openly communicated, managers may try to 'signal' the improved future prospects of the firm - and hence its increased value - through dividend payouts. The so-called dividend signalling hypothesis, which captures this mechanism, suggests that the market reacts to dividend increases in a positive fashion and therefore firms will have higher share prices because of such higher dividends. This paper attempts to provide a clearer theoretical understanding of dividend signalling by considering 234 non-financial UK PLCs over the period 1995 to 2006 using panel data and random effects regression models. The findings suggest firstly, dividend and earnings increases move in the same direction, as do share prices (in both the current and following year). Secondly, dividend payouts contain some information about earnings, although this link is confined to the current year. Finally, only marginal support is found for the dividend signalling hypothesis with earnings providing a stronger signal than dividends.
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Volume (Year): 4 (2012)
Issue (Month): 4 ()
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