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An empirical test of signalling theory

Author

Listed:
  • Burze Yasar
  • Thomas Martin
  • Timothy Kiessling

Abstract

Purpose - This study aims to support and extend signalling theory because of information asymmetry. This study also aims to answer the call to further negative signalling and explore immediate reactions to signals, thus alleviating a gap with regard to temporality of signalling. Design/methodology/approach - The study used two separate data sources, the S&P 500 and 51,500 pages of the public papers between 1981 and 1999, nearly 20 years of data. Inter-rater reliability, controlled for all macroeconomic announcements identified in the literature, is used, and the data are empirically tested using generalized autoregressive conditional heteroscedasticity (GJR-GARCH) modelling. Findings - In accordance with signalling theory and the efficient market hypothesis, the study found that receivers do react to positive signals from a credible insider signaller to obviate information asymmetry. In line with previous research, the study also finds that receivers react much stronger to negative signals. Practical implications - Investors, financial managers and top executives responsible for their stock price need to focus on presidential signalling as these directly affect market volatility. In particular, investors and financial managers can predict stock price volatility based upon signals from the president. Originality/value - This is the first research study that explores the correlation between presidential signalling and market volatility. This study is important for investors and financial managers.

Suggested Citation

  • Burze Yasar & Thomas Martin & Timothy Kiessling, 2020. "An empirical test of signalling theory," Management Research Review, Emerald Group Publishing Limited, vol. 43(11), pages 1309-1335, April.
    • Handle: RePEc:eme:mrrpps:mrr-08-2019-0338
    DOI: 10.1108/MRR-08-2019-0338
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    Citations

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    Cited by:

    1. Fei Ge & Peipei Wu & Yun Feng & Lu Gao, 2023. "Do enterprises with foreign direct investments in tax havens prefer charitable donations? Evidence from China," Asian Business & Management, Palgrave Macmillan, vol. 22(5), pages 2056-2076, November.
    2. Darko B. Vukovic & Orifjon O. U. Kurbonov & Moinak Maiti & Mustafa Özer & Milan Radovanovic, 2024. "Outperforming the market: a comparison of Star and NonStar analysts’ investment strategies and recommendations," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-15, December.
    3. Can, Ali Selcuk & Ekinci, Yuksel & Pino, Giovanni, 2021. "Joint brand advertising for emerging heritage sites," Annals of Tourism Research, Elsevier, vol. 91(C).
    4. Manal Alidarous, 2024. "Driving Venture Capital Interest: The Influence of the Big 4 Audit Firms on IPOs," JRFM, MDPI, vol. 17(7), pages 1-31, July.
    5. Prusak Błażej & Potrykus Marcin, 2022. "Stock price reaction to an arrangement approval in restructuring proceedings – the case of Poland," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 58(3), pages 279-298, September.

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