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Dividend signaling under economic adversity: Evidence from the London Stock Exchange

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  • Bozos, Konstantinos
  • Nikolopoulos, Konstantinos
  • Ramgandhi, Ghanamaruthy

Abstract

The signaling or information content hypothesis is amongst the most prominent theories attempting to explain dividend policy decisions. However, no research has, to date, examined the information content of dividends in conjunction with generalized economic adversity. With the majority of the western economies facing the tough reality of the economic recession since late 2007–early 2008, we focus on the possibility of asymmetrical dividend signaling effects between periods of stability and economic adversity. Using data from the London Stock Exchange (LSE), where earnings and dividend news are released simultaneously, we test the dividend signaling hypothesis and the interaction of earnings and dividends under both steady and adverse economic conditions. We document positive and significant average abnormal stock price returns around the dividend/earnings announcements. We also find a significant interaction between economic conditions and the information content of dividends. After testing the dividend signaling hypothesis under both stable and recessionary economic conditions we find that dividends have less information content than earnings in periods of growth and stability, but more in periods of economic adversity.

Suggested Citation

  • Bozos, Konstantinos & Nikolopoulos, Konstantinos & Ramgandhi, Ghanamaruthy, 2011. "Dividend signaling under economic adversity: Evidence from the London Stock Exchange," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 364-374.
    • Handle: RePEc:eee:finana:v:20:y:2011:i:5:p:364-374
    DOI: 10.1016/j.irfa.2011.07.003
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    More about this item

    Keywords

    Dividend policy; Signaling hypothesis; Recession; Economic sentiment; London Stock Exchange;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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