Answer to Question #26084 in Finance for Hassan Mortada

Question

‘Changes in dividend provide a signal to the market regarding the expected future performance of the company.’ Critically evaluate this statement on the basis of empirical evidence documented in finance literature

Answer 1

The presence of repeated dividend changes enables one to measure the extent to which firms signal the market via dividend
changes. In addition, firms that repeatedly change dividends to signal the
market establish a reputation with the market, and the reputation that the firm
establishes may be good, bad, or otherwise. In assuming that dividend changes
signal to the market management's knowledge of the expected level of a firm's
earnings, this study attempts to classify firms by their level of reputation
and to measure market response to dividend changes announced by firms in
different reputation classes.