Signaling Approach on dividend policy
The title of the article that I have chosen is “The Information Content of Dividends- A Signaling Approach” which was written by Sasson Bar-Yosef and Lucy Huffman. It is a journal of Financial And Quantitative Analysis, Volume 21 Number. 1. The date of publication was on 1 March 1986. Summary of the Article
The purpose of this article is to do the investigation and analysis to see how a corporation makes the decisions of dividend payment ratio by using a signaling theory. Dividend is considered as a distribution of a portion of a company’s earnings which is decided by the board of directors to a class of the corporation’s shareholders. Dividend can be distributed in the form of cash, stock or property. However, as a director, he or she must try to analyze intelligently to forecast the dividend payout ratio. Hence, a signaling theory has been used in this article to predict the corporate dividend decision. In this article, there are three main implications which signal the capital gains and the dividends payment. The first implication is the expected cash flow. Bhattarcharya suggested that,” if stockholders have imperfect information about firms’ profitability, and if there is a tax differential between capital gains and dividend, then dividends will be a surrogate for a signal of expected cash flow.” By proving the statement, an equation has been carried out in the journal to indicate that dividend increase as the expected cash flow increases. The second implication which helps to signal the dividend policy is the risk of company. In the article, they examine the behavior of the cash dividend payment and dividend payout ratio as a function of the cash flow risk through the derivation of calculation. The author of the article, Sasson Bar-Yosef and Lucy Huffman state that,” The difference in payout ratio is a consequence of variations in industry risk exposure. Note that the dividend-signaling model...
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