The expected favourableness of dividend signals, the direction of dividend change and the signalling role of dividend announcements

This paper proposes that corporate private information is transmitted to the market in two complementary phases. The accounting information is released first, followed by a dividend change announcement. Hence, investors assess the dividend signal only after consideration of accounting information. The analysis suggests that the dividend signal has three components: the expected favourableness of a dividend signal (good, bad, or ambiguous), the direction of dividend change (+ or -) and the role of the dividend signal (confirmatory, clarificatory or unclear) in clearing corporate uncertainty. The mechanism of classifying the signal according to the three components is presented and tested. Consistent with the dividend literature, dividend change announcements are found to influence share prices. Also, the role of dividend signals has a distinguishable effect on the firm's share price. Nevertheless, the expected favourableness of a dividend signal emerges as the dominant factor among the three signalling components.