Dividend Signalling Theory Case Study

In general, investors in the stock market requires a variety of information about whether or not a company to make investments, particularly information regarding the dividend announcement. This relates to a signal about the future prospects of a company is given by the management company to potential investors through the dividend announcement. One theory dividend policy relating to dividends as a signal is "Dividend Signalling Theory".

Dividend Signalling Theory was first proposed by Battacharya. This theory explains that the information about the cash dividend paid by the investor is considered as a signal of the company's prospects for the future. The assumption was attributed to asymmetric information between managers and investors, so

The fact that the price share changes with changes in the dividend solely for their information content in the dividend announcement. However, it is difficult to determine whether the change in the stock price following the change dividends due to: (1) the dividend policy is seen as a sign for investors is also called signalling effect, or (2) because the investor preferred dividends rather than capital gains is also called the preference effect, or (3) because the combination of both.

The company's actions give a signal to dividend payments in fact an act of scattering (burning of money), but good company prospects will be able to cover the cost of this signal in later in the day because it can sell the new shares at a higher price, while the company's poor prospects cannot do that matter. Signalling theory is consistent with the observation that the dividend payout is closely linked to profitability and companies that have large free cash flows to pay dividends in bulk. This theory also consistent with the observation that the market is responding with price increased significantly during the last initiation and increased dividends and decreases in large numbers when there are cuts