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The expected favourableness of dividend signals, the direction of dividend change and the signalling role of dividend announcements

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  • Said Elfakhani

Abstract

This paper proposes that corporate private information is transmitted to the market in two complementary phases. The accounting information is released first, followed by a dividend change announcement. Hence, investors assess the dividend signal only after consideration of accounting information. The analysis suggests that the dividend signal has three components: the expected favourableness of a dividend signal (good, bad, or ambiguous), the direction of dividend change (+ or -) and the role of the dividend signal (confirmatory, clarificatory or unclear) in clearing corporate uncertainty. The mechanism of classifying the signal according to the three components is presented and tested. Consistent with the dividend literature, dividend change announcements are found to influence share prices. Also, the role of dividend signals has a distinguishable effect on the firm's share price. Nevertheless, the expected favourableness of a dividend signal emerges as the dominant factor among the three signalling components.

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  • Said Elfakhani, 1998. "The expected favourableness of dividend signals, the direction of dividend change and the signalling role of dividend announcements," Applied Financial Economics, Taylor & Francis Journals, vol. 8(3), pages 221-230.
    • Handle: RePEc:taf:apfiec:v:8:y:1998:i:3:p:221-230
    DOI: 10.1080/096031098332989
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    Cited by:

    1. Taeyoon Sung & Daehwan Kim & Ludwig Chincarini, 2006. "Corporate scandals and the market response of dividend payout changes," Applied Financial Economics, Taylor & Francis Journals, vol. 16(7), pages 535-549.
    2. Nagendra Marisetty & M. Suresh Babu, 2023. "Stocks Abnormal Returns and Rate of Dividend Announcements," International Journal of Business and Management, Canadian Center of Science and Education, vol. 16(11), pages 1-33, February.
    3. David Williams & W. Duncan & Peter Ginter, 2010. "Testing a model of signals in the IPO offer process," Small Business Economics, Springer, vol. 34(4), pages 445-463, May.
    4. Nagendra Marisetty & M. Suresh Babu, 2021. "Dividend Announcements and Market Trends," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(10), pages 139-139, September.
    5. Said Elfakhani & Rita Ghantous & Imad Baalbaki, 2003. "Mega-mergers in the US banking industry," Applied Financial Economics, Taylor & Francis Journals, vol. 13(8), pages 609-622.
    6. Ben Howatt & Richard Zuber & John Gandar & Reinhold Lamb, 2009. "Dividends, earnings volatility and information," Applied Financial Economics, Taylor & Francis Journals, vol. 19(7), pages 551-562.
    7. K. H. Nguyen, 2014. "Impact of a dividend initiation wave on shareholder wealth," Applied Financial Economics, Taylor & Francis Journals, vol. 24(8), pages 573-586, April.
    8. Dr. Jeetendra Dangol, 2016. "Nepalese Stock Market Efficiency in Respect of Cash and Stock Dividend Announcement," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 7(3), pages 60-71, September.

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