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Signaling mechanism of corporate payout policy: A case of Indian firms

This paper examines the signaling effect of the payout decisions namely, cash dividends and share repurchases by BSE 500 index companies. It attempts to uncover the underlying forces behind the firm’s choices of payout policy in the Indian context. | Signaling mechanism of corporate payout policy A case of Indian firms Accounting 2 2016 53 66 Contents lists available at GrowingScience Accounting homepage www.GrowingScience.com ac ac.html Signaling mechanism of corporate payout policy A case of Indian firms Sadaf Anwara Shveta Singhb and P. K. Jainc a Research scholar in Finance at the Department of Management Studies Indian Institute of Technology Delhi IIT Delhi India b Associate Professor of Finance at the Department of Management Studies Indian Institute of Technology IIT Delhi India c Professor of Finance at the Department of Management Studies Indian Institute of Technology IIT Delhi India CHRONICLE ABSTRACT Article history Historically cash dividends are the most important form of payout policy however they have Received July 5 2015 been losing popularity relative to share repurchases. This paper examines the signaling effect Received in revised format of the payout decisions namely cash dividends and share repurchases by BSE 500 index August 16 2015 companies. It attempts to uncover the underlying forces behind the firm s choices of payout Accepted January 6 2016 Available online policy in the Indian context. Using the standard Event Standard Methodology a strong case January 11 2016 of positive signaling is reported in case of repurchase announcements vis-a-vis cash dividend Keywords announcements. It is observed that cash dividends are not perceived by investors as positive Event Study Cash Dividends signals as they prefer their earnings to be retained by the companies for growth prospects. In Share Repurchases case of share repurchases the existence of undervaluation signaling and wealth transfer Signaling hypotheses is reported consistent with the fact the share repurchases are welcomed by the India Indian companies. The results would provide insights into the economics of the choice between cash dividends versus share repurchases as payout mechanism adopted by the sample companies. The findings .