Strategic reactions to information content of dividend change: applying BCG growth share matrix when signalling hypothesis identified

Alireza Aghaee Shahrbabaki (), Saeed Sakkaki, Peyman Parsa, Mohammad Saeed Heidary and Vahid Yousefi Pour
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Alireza Aghaee Shahrbabaki: Bocconi University, Italy
Saeed Sakkaki: Sharif University of Technology, Iran
Peyman Parsa: K. N. Toosi University of Technology, Iran
Mohammad Saeed Heidary: Allameh Tabataba'i University, Iran
Vahid Yousefi Pour: Allameh Tabataba'i University, Iran

Entrepreneurship and Sustainability Issues, 2020, vol. 8, issue 2, 10-32

Abstract: The signaling hypothesis has been vastly under investigation for many years. There are two attitudes towards this phenomenon; some believe that firms increase (decrease) their dividend to signal about the future increases in earnings due to asymmetric information that managers have. Adversely, others believe that firms usually increase their dividends when they do not have further lucrative projects with positive net present values. Although there is a lot of empirical testing about this hypothesis that has been placed, there is no investigation about agency costs and cheating potential signaling hypothesis can provide for managers to cheat shareowners and market if it happens in the stock market. Through this article, we will test the signaling hypothesis for the firms listed in Tehran Stock Exchange, a rather volatile emerging market. We concluded that while dividend increases have no significant information content about future earnings, dividend decreases have meaningful information content about decreasing earning in the future. We use different scenarios that managers can react if the signaling hypothesis occurs and analyze the agency cost these scenarios bear on shareowners.

Keywords: dividend policy; signaling theory; agency cost; BCG matrix (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:ssi:jouesi:v:8:y:2020:i:2:p:10-32

DOI: 10.9770/jesi.2020.8.2(1)

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