An Alignment of Financial Signaling and Stock Return Synchronicity

Tarek Eldomiaty (), Islam Azzam, Karim Tarek Hamed Afifi and Mohamed Hashim Rashwan
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Tarek Eldomiaty: School of Business, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt
Islam Azzam: School of Business, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt
Karim Tarek Hamed Afifi: College of Management & Technology, The Arab Academy for Science and Technology, Cairo P.O. Box 2033, Egypt
Mohamed Hashim Rashwan: Business Administration, Economics and Political Science, The British University in Egypt, P.O. Box 43, Cairo 11837, Egypt

JRFM, 2024, vol. 17, issue 4, 1-12

Abstract: Financial signaling and stock return synchronicity may not be at crossroads. This paper optimizes the signaling effect of firms’ financial indicators on stock return synchronicity. The ultimate objective is to align firms’ financial signaling and stock return synchronicity, which implies a benefit of hedging against fluctuations in the stock market index. The data cover quarterly periods from June 1992 to March 2022 for the non-financial firms listed in the DJIA30 and NASDAQ100. This paper examines the observed return synchronicity as the dependent variable. The independent variables are classified into six groups namely, Solvency (or Liquidity) ratios, Assets Efficiency ratios, Expense Control ratios, Debt (or Leverage) ratios, Profitability ratios, and Dividend ratios. The analysis is conducted on two different groups. The first group examines the observed firms’ financials that affect observed stock return synchronicity. The second group examines optimal firms’ financials that help optimize stock return synchronicity. The final results show that (a) current stock return synchronicity is affected positively by cash ratio, and negatively by receivables and historical growth of earnings; (b) optimal stock return synchronicity can be elevated using significant financial indicators namely, Inventory/Current Assets, Net Working Capital/Total Assets, Net worth/Fixed Assets, and Sales Annual Growth; (c) agency conflicts between managers and shareholders can be mitigated by the aforementioned financial indicators, which do not include debt financing being the common source of agency conflicts; and (d) dividends are still insignificant to stock return synchronization.

Keywords: capital structure; dividends policy; signaling theory; stock return synchronicity (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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