Dividends and Market Signalling: an Analysis of Corporate Insider Trading

Esther B. Del Brio and Alberto De Miguel

European Financial Management, 2010, vol. 16, issue 3, 480-497

Abstract: This study tests the multiple†signal theory of dividends of John and Lang (1991) in the context of a European market. Our evidence shows that investors are more sensitive to insider trading signals than to signalled changes in existing dividends. In effect, the insider sales signal is universally understood as bad news. After controlling for the quality of a firm's investment opportunities, investors are found to penalise dividend outflows by mature firms that exhibit more informed insider sales activity. Finally, we offer an innovative exploration of the role of earnings announcements in market reaction to the dividend signal.

Date: 2010
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