The impact of informed trading on dividend signaling: a theoretical and empirical examination |
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| Affiliation: | 1. Manchester Business School, Booth Street West, Manchester M15 6PB, UK;2. The School of Economics, Finance and Management, University of Bristol, UK;1. Manipal Academy of Higher Education and Faculty Associate, T A Pai Management Institute, India;2. Department of HRM & OB, Jagdish Sheth School of Management, Bangalore, India;3. Department of HR, OB & Communications, T A Pai Management Institute, Manipal Academy of Higher Education, India;4. Department of Operations and Decision Sciences, T A Pai Management Institute, Manipal Academy of Higher Education, India |
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| Abstract: | This paper examines how the trading behavior of various investors impacts the market reaction to a dividend signal. The dividend signaling model incorporates asymmetric information among traders, firm insiders, and the market. This interaction among market participants explains why not all dividend increases are viewed by the market as good news. The model predicts that the announcement day returns for a dividend increase are inversely related to measures of informed trading and decreasing in the level of buy demand relative to sell demand. Further, the model hypothesizes that more informed trading results in larger dividend increases. Empirical tests confirm these predictions. |
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