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Strategic reactions to information content of dividend change: applying BCG growth share matrix when signalling hypothesis identified

Author

Listed:
  • Alireza Aghaee Shahrbabaki

    (Bocconi University, Italy)

  • Saeed Sakkaki

    (Sharif University of Technology, Iran)

  • Peyman Parsa

    (K. N. Toosi University of Technology, Iran)

  • Mohammad Saeed Heidary

    (Allameh Tabataba'i University, Iran)

  • Vahid Yousefi Pour

    (Allameh Tabataba'i University, Iran)

Abstract

The signaling hypothesis has been vastly under investigation for many years. There are two attitudes towards this phenomenon; some believe that firms increase (decrease) their dividend to signal about the future increases in earnings due to asymmetric information that managers have. Adversely, others believe that firms usually increase their dividends when they do not have further lucrative projects with positive net present values. Although there is a lot of empirical testing about this hypothesis that has been placed, there is no investigation about agency costs and cheating potential signaling hypothesis can provide for managers to cheat shareowners and market if it happens in the stock market. Through this article, we will test the signaling hypothesis for the firms listed in Tehran Stock Exchange, a rather volatile emerging market. We concluded that while dividend increases have no significant information content about future earnings, dividend decreases have meaningful information content about decreasing earning in the future. We use different scenarios that managers can react if the signaling hypothesis occurs and analyze the agency cost these scenarios bear on shareowners.

Suggested Citation

  • Alireza Aghaee Shahrbabaki & Saeed Sakkaki & Peyman Parsa & Mohammad Saeed Heidary & Vahid Yousefi Pour, 2020. "Strategic reactions to information content of dividend change: applying BCG growth share matrix when signalling hypothesis identified," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 8(2), pages 10-32, December.
    • Handle: RePEc:ssi:jouesi:v:8:y:2020:i:2:p:10-32
    DOI: 10.9770/jesi.2020.8.2(1)
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    References listed on IDEAS

    as
    1. Denis, David J. & Osobov, Igor, 2008. "Why do firms pay dividends? International evidence on the determinants of dividend policy," Journal of Financial Economics, Elsevier, vol. 89(1), pages 62-82, July.
    2. Wasim Khalil Al-Shattarat & Basiem Khalil Al-Shattarat & Ruba Hamed, 2018. "Do dividends announcements signal future earnings changes for Jordanian firms?," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 16(3), pages 417-442, September.
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    More about this item

    Keywords

    dividend policy; signaling theory; agency cost; BCG matrix;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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