The Announcement of Dividend Payouts and Its Reflection In Stock Returns within the Framework of Signaling Theory
“An Empirical Study of Listed Companies In the Iraq Stock Exchange for the Period 2016-2023”
A dissertation submitted to the council of the college Administration and economics university of Kerbala, as a partial fulfillment of the requirements to obtain Ph.D. Degree in the financial and banking sciences.
By:
Sajjad Yousif Khalaf
Under Supervision:
Ass. Prof. Dr. Saad Majeed Al-janabi Ass. Prof. Dr.Mohammad Faiz Hasan
Abstract:
This study aims to elucidate the declaration of dividend payouts and its reflection on the stock returns of companies within the framework of the signaling theory. It investigates the role played by the transmitted information regarding these announcements in explaining the information asymmetry prevalent among most companies, thereby assisting investors in obtaining information that enhances the semi-strong efficiency of the financial market. This allows for prudent decision-making through the transmitted information before and after the dividend announcement. Such information can be perceived as a positive signal indicating the company’s financial health and its ability to achieve sustainable future profits, thereby boosting market confidence and driving up its stock prices. Conversely, some might interpret it as a negative signal, which would adversely affect the company’s stock returns and lead to a decline.
The current study focuses on several dimensions, including company size, the frequency of dividend announcements, the type of shares held by these companies, and testing the semi-strong efficiency of the Iraq Stock Exchange. The objective is to address the information asymmetry gap between internal insiders (company managers) and external investors, enabling investors to avoid future losses and prevent erroneous decision-making.
The study sample comprises thirty companies listed on the Iraq Stock Exchange that announced their dividend payouts from January 1, 2016, to December 31, 2023, with a total of 102 announcements. A combination of financial and statistical methods was employed using the SPSS statistical analysis software to test the study hypotheses, along with Excel for financial analysis of the study variables.
The study concluded with several key findings, the most significant of which is that dividend announcements carry impactful information, as evidenced by the achievement of abnormal cumulative returns, both positive and negative, for the companies in the sample before and after the dividend announcements across all sectors in the Iraq Stock Exchange. If the dividend announcements did not contain impactful information, abnormal returns, whether positive or negative, would not have been realized, indicating the existence of information asymmetry and thus a semi-strong inefficient market. Therefore, the signaling theory is considered one of the theories that mitigates information asymmetry among the involved parties, providing information to investors that contributes to enhancing market efficiency and subsequently reducing the information asymmetry gap, aiding them in making more accurate decisions.
