Asymmetric Information and Signaling Theory: Panel Causality Approach on the Relationship between Dividends and Earnings

Year 2016, Volume: 15 Issue: 4, 1132 - 1145, 28.10.2016

Yunus Kılıç , Mehmet Fatih Buğan , B. Dilek Özbezek

https://doi.org/10.21547/jss.265502

Cited By: 2

Abstract

It has been long
debated how, with what methods, to what extent, and how much should the
earnings obtained in companies be distributed so as to maximize the market
value of companies. The extent of the dividends any company would distribute to
its stakeholders undoubtedly depends on the profitability situation of the
relevant period. However, the distributed dividends provide reliable
information concerning the future earnings of the company. For this reason, the
short- and long-time relationship between dividends and earnings should be
evaluated in a bidirectional way. In this study, the relationship between
dividends and earnings per share for the period between 1990 and 2014 has been
studied using two different panel causality tests and the asymmetric-information-based
signal effect has been analyzed for individual companies. As a result of the
tests conducted, a weak causality relationship has been detected between
changes in dividends and companies’ future earnings. Obtained findings have
pointed out that, in most companies, earnings are more effective in identifying
future dividends.

Keywords

Signaling Theory, Earnings per Share, Dividends, Panel Causality Test

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