Signalling Effect of Dividends
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Transcript of Signalling Effect of Dividends
The paper is authored by Naimat Ullah Khan in collaboration with Bruce Burton and David
Power. It investigates the signaling impact of dividends on share prices in Pakistan. The study
has adopted semi-structured interview for interaction with participants. The study involves
interaction with 16 financial analysts and 23 company executives.
Dividend signaling theory argues that dividend bears either positive or negative impact with the
prospects of future earnings. Concomitantly the impact leads to increase or decrease in share
prices. This paper looks into signaling effects of dividends in Pakistani market in the light of a
well-placed executives and experienced analysts. Studies have been carried out before, some
endorsed the correlation while others rejected the presence of any relation between the two.
Findings from the responses of the participants are listed below:
A study in this regard suggested earlier the possibility of leakage of dividend information
before official announcements manipulating share value. Opinions of respondents were
divided on the issue. Some emphatically rejected, terming the abnormal activity in
market before the announcement as ‘guesswork’ of professionals. Others did not rule
out the possibility but opined that the probability was abysmally low.
Interviewees strongly supported the view that an increase in dividend results in rise of
share prices. In case of dividend cut different methods are employed to educate
customers about the reasons to avert any negative impact on stock prices.
Prior studies suggested that earning per share play dominant role in signaling with
dividend relegated to secondary position. Views of the respondents suggested the inter
relation between the two but majority of them vouched for the earning per share being
the primary player.
Little evidence was found for any deliberate or accidental leakage of sensitive information prior
to the official announcement. Further, the study found out that among dividends and EPS, the
later was believed to play an instrumental role.