Answer to Question #26084 in Finance for Hassan Mortada
‘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
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.