Information content hypothesis
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Information content hypothesis (alternatively known as information signaling hypothesis) is a theory that holds that investors regard dividend changes as “signals” of management forecasts. Thus, when dividends are raised, this is viewed by investors as recognition by management of future earnings increases. Therefore, if a firm's stock price increases with a dividend increase, the reason may not be investor preference for dividends but rather expectations of higher future earnings. Conversely, a dividend reduction may signal that management is forecasting poor earnings in the future.
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Information content hypothesis (information signaling hypothesis). A theory that holds that investors regard dividend changes as “signals” of management forecasts. Thus, when dividends are raised, this is viewed by investors as recognition by management of future earnings increases. Therefore, if a firm's stock price increases with a dividend increase, the reason may not be investor preference for dividends but rather expectations of higher future earnings. Conversely, a dividend reduction may signal that management is forecasting poor earnings in the future.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
