Information signaling effect theory, Finance Basics

Information Signaling Effect Theory

Advanced via Stephen Ross in year 1977, He argued such in an inefficient market; management can utilize dividend policy to signal significant information to the market that is only known to them.

Example - If the management pays high dividends, it signals high expected profits in future to keep the high dividend level. This would rises the share price/value and vice versa.

MM attacked this position and suggested that the change in share price following the change in dividend amount is because of informational content of dividend policy quite than dividend policy itself. Consequently, dividends are irrelevant if information can be specified to the market to all players.

Dividend decisions are relevant in an inefficient market and the dividends the higher, the higher the value of the firm. The theory is based upon the following four suppositions:

1. The sending of signals with the management must be cost effective.

2. The signals must be correlated to observable events as general trend in the market.

3. No company can imitate its competitors in transfer the signals.

4. The managers can only sent true signals even if they are bad signals. A transfer untrue signal is financially disastrous to the survival of the firm.

Posted Date: 1/31/2013 2:35:09 AM | Location : United States







Related Discussions:- Information signaling effect theory, Assignment Help, Ask Question on Information signaling effect theory, Get Answer, Expert's Help, Information signaling effect theory Discussions

Write discussion on Information signaling effect theory
Your posts are moderated
Related Questions
DIY Inc. plans to raise $200,000 with a right offering. The current stock price is $100 and there are 80,000 shares outstanding.  a. If DIY sets the subscription price to be $80

Accounts Payable Turnover Ratio Ratio for Account Payable Turnover is as Follow: Creditors/accounts payable turnover = Annual credit purchases /Average creditors

1. Using the variance-covariance matrix (∑) and the expected return vector (er) given in the appendix, calculate the set of weights that correspond to the portfolio that maximizes

Types of Partners 1. General Partners -Unlimited active and liability in participation in partnership activities. 2. Limited partners - Limited liability in the management of

Solutions to agency problem The bondholders might receive the following procedures to protect themselves from the process of the shareholders that might dilute the value of th

Advantagesand Disadvantages of IRR Advantages of IRR It seems time value of money It seems cash flows over the whole life of the project. It is compatible along

Net Present Value Method - DCF Technique The method discounts outflows and inflows and ascertains the total present value via deducting discounted outflows from discounted inf

ksklklsdfmklsnakakngjkalkgblakbgklabgklagkbaskgbljas a kalks las lgaskgbak a lv aslglaksglas la sla

If banks expect an unusually large increase in withdraws from checking deposit accounts in the near future, what would happen to the federal funds rate, borrowed reserves and nonbo

Similarities between Preference Share Capital and Debt Similarities between Preference Share Capital and Debt are as follows: a) Both have fixed returns. b) Both do not