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Dividend signaling

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Signaling. It is well documented that stock prices tend to rise when firms announce an increase in their dividend payouts. How then can it be said that dividend policy is irrelevant?

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Solution Summary

Dividend signaling is also defined.

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Dividend signaling:

Management is adapting the policy of paying a stable dividend in the face of fluctuating earnings because of following reasons:

? Information content
According to this philosophy, Management may be able to affect the expectations of investors through the informational content of dividends. A stable dividend suggests that the company expect stable or growing dividends in the future.

? Current income desires
As discussed above due to uncertain future some investors who desire a specific periodic income will prefer a company with stable dividends to one with unstable dividends.

? Institutional considerations
A stable dividend may permit certain institutional ...

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