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Corporate risk management and dividend signaling theory

Georges Dionne and Karima Ouederni

Finance Research Letters, 2011, vol. 8, issue 4, 188-195

Abstract: This article investigates the effect of corporate risk management on dividend policy. We extend the signaling framework of Bhattacharya [1979. Bell Journal of Economics 10, 259–270] by including the possibility of hedging the future cash flow. We find that the higher the hedging level, the lower the incremental dividend. This result is intuitive. It is in line with studies suggesting that cash flows’ predictability decreases the marginal gain from costly signaling through dividends and the assertion that corporate hedging decreases cash flow volatility. It is also in line with the purported positive relation between information asymmetry and dividend policy (e.g., Miller and Rock [1985. The Journal of Finance 40, 1031–1051]) and the assertion that risk management alleviates the information asymmetry problem (e.g., DaDalt et al. [2002. The Journal of Future Markets 22, 261–267]). Our theoretical model has testable implications.

Keywords: Signaling theory; Dividend policy; Risk management policy; Corporate hedging; Information asymmetry (search for similar items in EconPapers)
JEL-codes: G30 G32 G35 D82 (search for similar items in EconPapers)
Date: 2011
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Working Paper: Corporate Risk Management and Dividend Signaling Theory (2010) Downloads
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