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company dividend increase, share price does not change, but the market index keep increasing. How to...

company dividend increase, share price does not change, but the market index keep increasing.

How to explain by signalling hypothesis?

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Expert Solution

When the company dividend increase, the market index keep increasing. This is because of signaling effect. Dividend signaling theory states that when a company announce an increase in dividend payouts, it is considered as an indication of positive changes in the market. Likewise, a decrease in the dividend payouts will lead to negative performance by the company in the future. An increase in dividend pay-out is considered as a signal for some positive happenings in the market.

Though there are no changes in the price of the shares, a positive future performance of the company's stock will happen in the market. Then the market index will keep increasing.

jeff jeffy answered 2 years ago
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