Revisiting the Contemporaneous Signaling Effects of Earnings and Dividend Announcements
Posted: 19 Feb 2004
Date Written: December 30, 2003
Existing literature suggests that earnings and its forecasts provide stronger signal than dividends about firms' future performance. We test the signaling effects of earnings and dividends under a market setting which has 1) low informativeness of earnings due to concentrated family-shareholding ownership structure; 2) low corporate transparency; and 3) no tax on dividends. Our results show significant share price reactions during earnings and dividend announcements. While the non-taxable feature of dividends does not substantially weaken its signaling effect, the low information content of earnings and low corporate transparency of firms reduce the signaling power of earnings. We find that dividend, from the perspective of the firms, is a more effective and cost-efficient channel to signal future performance.
Keywords: Earnings, dividends, information asymmetry, signaling effects
JEL Classification: D82, G12, G14, G35, M41
Suggested Citation: Suggested Citation