The Signaling Hypothesis: Evidence From The Nairobi Securities Exchange

Abstract

This study investigates the signaling hypothesis by testing the displacement property of dividends. The study uses Ohlson (1995; 2001) model and follows Hand and Landsman (2005) approach. The study however varies the methodology by using pooled Time Series Cross Section data and Panel Corrected Standard Error estimation and also control for size to take care of scale effects. The study’s findings provide further empirical evidence that dividends are used as signals about future earnings prospects of the firm. After following Thakor (2003) approach in testing for the free cashflow hypothesis, the study’s results do not provide evidence in favour of the cashflow hypothesis it is therefore ruled out. The study’s results shed further insights on the controversy regarding the information content of dividend changes about future profitability.