Do Dividends Signal the Future?: Empirical Evidence from Bangladesh

The role of dividend in mitigating information asymmetry and agency conflicts between shareholders and managers has been extensively researched in the U.S. context. The argument that dividend could act as a signaling device to mitigate information asymmetry ii based on the dispersion of ownership hypothesis. In this scenario, it is perceived that, dividend changes are not actions that just happen to have information content. Rather these are explicit signals about future earnings sent intentionally and at some cost by management to the firm, and its stockholders. This implies that dividend change announcements should be positively related to stock returns because a higher dividend signals higher current and future earnings. Empirical evidence supports this conjecture. However. in an environment of concentrated ownership by sponsor families-typical of Bangladesh- the role of dividend as a signaling device should diminish. This paper empirically tests this proposition and finds support consistent with this hypothesis.