CHAPTER -1

INTRODUCTIO

N
1
 Introduction

Financial Signaling theory states that changes in Financial policy convey information

about changes in future cash flows. Dividend signaling suggests a positive relation

between asymmetry and dividend policy. In other words, the higher the asymmetric

information level, the higher is the sensitivity of the dividend to future prospects of the

fir. Several empirical studies attempt to test the informational content of financial

singling , yet they disagree about the sign and the significance of information asymmetry

on dividend policy.

Signalling theory in finance is a term used to describe the behaviour of two parties that

have different information. It states that corporate financial decisions are signals that are

sent by managers to investors so as to shake them up.

Dividend theory suggests that dividend is sticky and it can be used to signal quality of the

firms. However, empirical evidences do not strongly support the signaling efficiency of

dividend to future firms’ performance. Specifically, when dividend surprise is measured

2
in terms of differences from past dividend, empirical research cannot find strong

relationship between dividend surprise in current period and future firm performance.

Another strand of literature suggests that corporate risk management alleviates

information asymmetry problems and hence positively affects the firm value. Information

asymmetry between managers and outside investors is one of the key market

imperfections that makes hedging potentially benefit.

In this assignment we exploit the documented interaction between the level of

information asymmetry and the financial singling , along with its interaction with

corporate risk management. We argue that risk management alleviates the asymmetric

information problem, which is a main determinant of dividend policy.

The negative impact on stock prices of equity issues and dividend reductions constitutes a

substantial "cost to false signalling," which keeps management honest and adds

credibility to dividend and repurchase signals. The constraints imposed by the

information imbalance between firms and investors have important implications for

corporate financial decisions. It should be apparent that decisions concerning dividends,

repurchases, and equity issues are interrelated. These decisions must be determined

jointly to avoid paying the cost inherent in violating the cash flow constraint and reducing

dividends and/or issuing equity.

3
CHAPTER -2

SCOPE
4
 Scope

Signaling theory is useful for describing behavior when two parties (individuals or

organizations) have access to different information. Typically, one party, the

sender, must choose whether and how to communicate (or signal) that information,

and the other party, the receiver, must choose how to interpret the signal.

Accordingly, signaling theory holds a prominent position in a variety of

management literatures, including strategic management, entrepreneurship, and

human resource management. While the use of signaling theory has gained

momentum in recent years, its central tenets have become blurred as it has been

applied to organizational concerns. Dividend theory suggests that dividend is

sticky and it can be used to signal quality of the firms. However, empirical

evidences do not strongly support the signaling efficiency of dividend to future

firms’ performance. Specifically, when dividend surprise is measured in terms of

5
differences from past dividend, empirical research cannot find strong relationship

between dividend surprise in current period and future firm performance. There

were huge scopes to work in the arena of the case. Considering the dead line, the

scope and exposure of the paper has been wide-ranging. The study behind

“Signaling Theory Assessment” has covered overall analysis in making

investment decision the different information system applied in signaling theory,

advantages applying the method and solution are shown in this case.

6
CHAPTER -3

OBJECTIVES

7
 Objectives of the Study

The main objective of this case study is to earn knowledge about the Signaling Theory

and its impact on company’s investment and management decision making.

Primary Objectives:
The main objective of this assignment is to analyze Signaling Theory.

Secondary Objectives:
This assignment has also some other objectives which are as follows:

 To understand the concept of financial signaling

 To analysis relation between signaling & Financial Decisions
 To know about dividend signaling
 To know about its impact on capital structure.
 To find out information problems in investment decision making

8
CHAPTER -3

LITERATURE
OF
REVIEW

9
 Literature of Review

Modigliani and Miller (1961) argued that dividend may have a signalling effect. The top

management of a firm has more information about the strategy of the firm and can also

forecast future earnings of the company.

Therefore, people working in the firm have more information as the other investors and

the market in general. Thus this leads to the problem of information asymmetry. Hence,

firms can use dividends as a signalling mechanism which sends information to investors

in the market or to its shareholders. The information may reflect the strategies that the

firm is employing in the short run or long run. Managers of the firm can change the

expectations of people with regards to its future earnings through dividends. A firm has

several ways is sending information to the market. This can include costly methods

which will prevent smaller firms from imitating the signal. The methods refer to

increasing the price of dividend; that is increasing dividend payout.

However, the firm must also be able to sustain the costs of conveying the information.

Miller and Rock (1985) discussed that finance indeed have a signalling role but there

are ‘dissipative’ costs that are involved and these are the firms’ investment decisions. As

mentioned previously, a firm who must pay a level of dividend which is high enough to
10
avoid smaller firms to imitate the same strategy. The increase in dividend should

eventually lead a share price increase and similarly, a decrease in the dividend should

cause the price of the share to fall. Due to the subjective nature of dividend payout,

some studies have actually found out that the relationship between dividend and share

price provides support to the hypothesis that dividends do carry information to the

market about future expected profits (Griffin, 1976). However, though managers use

dividend to convey information, dividend changes may not be the perfect signal.

According to Easterbrook (1994), dividend increase may be an ambiguous signal unless

the market can distinguish between growing firms and disinvesting firms.

Many of the things we want to know about each other are not directly perceivable.

These qualities include emotional states (are you happy?), innate abilities (are you

smart?), and the likelihood of acting a particular way in the future (will you be a loyal

friend?). Instead, we must rely upon signals, which are perceivable indicators of these

not directly observable qualities.

Qualities can be almost anything: strength, honesty, genetic robustness, poisonousness,

suitability for bookkeeping employment, etc. We rely on signals when direct evaluation

of the quality is too difficult or dangerous. A bird wants to know if the butterfly it is

about to eat is poisonous before it takes a bite, and relies on the signal of wing markings

to decide whether to eat or move on. An employer wants to determine before making a

hiring decision whether a candidate will be successful or not, and relies on signals such
11
as a resume, references, and the candidate’s actions and appearance to predict

suitability for the job. A smile can be a signal of happiness, a wedding ring a signal of

being married, wrinkled hands a signal of age, and a big house a signal of wealth. Our

language is full of signals, both the words we say and the way we say them. Saying “yes, I

would like an extra-big helping of your special Tuna-Delight” can be a signal of hunger or

of politeness and the accent with which it is said can signal country of origin and social

class. Indeed, much of our communication, whether it is with words, gestures, or

displays of possessions, consists of signaling cues about who we are and what we are

thinking.

Signals have varying degrees of reliability. Some are quite highly correlated with the

quality they represent: upon seeing such a signal, one can be sure that the quality is

present. Seeing someone lift a 200 lb weight is a reliable signal of strength; no matter

how much a weaker person wishes to signal strength, without actually possessing that

quality he or she will not be able to lift that weight. Others signals are less reliable and

can be imitated by those who wish to give the impression of having the quality, without

actually possessing it. Most people wearing wedding rings are indeed married, but an

unmarried woman may choose to wear one to signal that she is married to forestall

unwanted attention.

Signaling theory is concerned with understanding why certain signals are reliable and

others are not. It looks at how the signal is related to the quality it represents and what
12
are the elements of the signal or the surrounding community that keep it reliable. It

looks at what happens when signals are not entirely reliable – how much unreliability

can be tolerated before the signal simply becomes meaningless?

Signaling occurs in competitive environments. The interests of the sender and the

receiver seldom align exactly, and often they are quite at odds with each other.

Sometimes the competition is fierce and overt, as with prey and predators. Potential

prey may signal to predators that they are poisonous or that they can run so fast or fight

back so strongly that pursuing them is futile. Potential competitors may signal their

strength to each other; if they are unevenly matched, the weaker may acquiesce and

actual battle, which is costly for all, can be avoided. Sometimes the competition is

subtle, as when the signaling is between seemingly congenial companions. But even

within cooperative relationships there are conflicts of interest about how plans and

identity are perceived. I wish to present myself in the best possible light while you want

to know what I am really thinking and what I really can and will do.

In competitive situations, being deceptive can be quite beneficial. If a bug presents itself

as poisonous when it is not, it may avoid being eaten. If I present myself as more

experienced than I really am, I may get a better job. Yet if the rate of deception becomes

too high, the signal loses its meaning. So, for communication to occur, for signals to

maintain their significance, something must limit the rate of deception. This is the core

question of signaling theory: what keeps signals reliable?

13
The answer is costs: a signal will be reliable if it is beneficial to produce truthfully, yet

prohibitively costly to produce falsely. There are two main sources of these costs: the

signal itself may be costly to produce or the punishment if caught cheating may be high.

If a signal is costly to produce in the domain of the quality being signaled, it will tend to

be reliable. In the animal world, the prototypical example is the immense antlers that

signal the strength in an elk. Carrying such antlers is very costly in terms of strength; a

weaker elk cannot afford to expend so much of its strength on this display, and thus

must have smaller antlers. A common example in the human domain is owning an exotic

sports car as a signal of wealth.. Buying and maintaining such a car is very costly in terms

of money a poorer person could not afford to spend so much on this display and thus

must make do with a more basic form of transportation. Such signals are relatively less

costly for the honest signaler who has the quality than they are for the dishonest mimic.

Other signals are reliable because the punishment costs if one is caught being deceptive

are so high that it is seldom worth risking them. Signaling that you are a police officer

with a siren in your car may be an effective way of getting quickly through a traffic jam,

but most people believe the potential punishment is be too high to make the

convenience worthwhile. Here, the community provides punishment costs - in this case

in the form of fines or jail time - which discourage this deceptive signaling.

How does the receiver of a signal know that it indicates a certain quality? This question

has received little attention in previous work on signaling theory, much of which has
14
come from theoretical biology. Most of the models of signaling behavior assume perfect

communication, where what the signaler meant by the signal is the same as what the

receiver interprets; the key question being the truthfulness of the signaler’s claim. Yet in

human communication (and presumably, at times, in animal communication)

imperfections abound. Codes are the mappings from signals to qualities. To the extent

two people share codes, the signals they exchange will be comprehensible to each other.

And to the extent that they do not, a signal will be interpreted differently than it was

intended to be.

15
CHAPTER -4

RESEARCH
METHODOLO
GY

16
Research Methodology

The design of any research project requires considerable attention to the research

methods and the proposed data analysis. Within this section, we have attempted to

provide some information about how to produce a research design for a study. We

offer a basic overview of the research methods portion of a research proposal and

then some data analysis templates for different types of designs. Our goal is not to

answer every question, but provide a head start.

Research Methods

The methods section of any proposal must address several fundamental design

components. The research method documents describes a number of components

required for a fundable proposal.

Data Analysis Methods

Data analysis methods vary considerably from and even within the types of

research designs. Some methods, such as single-subject designs, do not necessarily

need a statistical analysis to convey experimental control over the dependent

variables. Most “quantitative” designs, such as randomized trials and many quasi-

experimental designs, require statistical analysis. The statistical analysis templates

cover quantitative methods and include the following design and analysis

combinations:

17
The methods section of any proposal must address several fundamental design

components. It helps to begin with a respecification of the research hypotheses.

Then the research methods must (a) outline the design and present a timeline, (b)

describe participant selection and recruitment, (c) explain the procedures for

assignment to condition and methods for experimental control, (d) describe the

independent variable, the intervention, (e) present the dependent variables or

measures, (f) discuss data collection and management procedures, (g) provide the

data analysis strategy, including a power analysis, if appropriate, and (h) address

attrition and missing data.

Design and Timeline

The research design should include a general overview of the project. Consider this

section as an abstract of the methods portion of the proposal, with a few additions.

This section often include a figure that helps document when key events take

place. These events may include recruitment, assignment to condition, intervention

activities, assessments, and any other key features of the design that will help

reviewers understand the research plan.

Often designs falls into a standard category, and it helps to explain such designs in

standard terminology. Potential research designs include randomized controlled

trials, nonequivalent groups designs, single-condition designs, clustered trials,

18
regression discontinuity designs, single-subject trials, and so on. The details will

vary substantially by design type. For example, a randomized trial can range from

a post-only design to a longitudinal model with multiple assessments before,

during, and after the intervention. Similarly, single-subject research covers a wide

range of designs. This overview of the research design and all following sections

must accommodate the specific research design type chosen for the project.

The choice of a design can be complicated. It often requires an iterative process

comparing the advantages and disadvantages of each design in terms of participant

selection and recruitment, the independent and dependent variables, analysis

methods, and the budget. Because all these factors influence the overall design of

the project, the decision process will benefit from experts in (a) the theory of the

intervention and processes under study, (b) the pragmatic details of recruitment,

intervention, and assessments, and (c) research methods, including design and

statistics.

Participant Selection

Participant selection often begins with the identification of the population of

interest. This section must then describe how project staff will select a sample and

recruit participants.

19
The sample selection methods depend on the overall goal of the research project.

For example, if the results must generalize to all similar people in the population,

random sampling from the population will achieve that goal. On the other hand, the

choice of a convenience sample would allow for the direct comparison of a specific

intervention with a control group, and such a sample might involve reduced costs

and simpler procedures. This section, however, should clearly describe the sample

selection procedures and the number of students included in the sample.

This section must also include a clear description of the recruitment procedures.

This includes information about how contacts are made, the type of consent

process, if any, and related information that allows reviewers to judge the value of

the final set of participants. Not all people identified as part of the sample will

agree to participate, so this process should identify the number of participants

expected to take part. This defines the initial sample. Finally, if the design calls for

multiple assessments across time, this section should describe the expected rates of

attrition. Although the analysis section will describe the details of the analysis in

light of attrition, allusion to those methods here can provide the reader with a

useful preview.

20
Assignment to Condition

For studies with more than one condition, assignment becomes an important

feature of the research methods. In a randomized trial, research staff must place

students into conditions randomly, and this section must state exactly how that will

happen. There are many acceptable options, such as assignment via coin flip, a

random number table, the use of a statistical program, the roll of dice, and so on.

Nonrandomized comparison studies, such as the quasi-experimental nonequivalent

groups design, also require assignment. Some researchers will order participants on

a key variable of interest, and then randomly assign pairs, assuming two

conditions, to treatment or control, working their way down the list. This is useful

in small randomized trials or nonrandomized trials to ensure that the two groups

are somewhat similar at the beginning of the project. Regression discontinuity

designs also require assignment to condition. In this case, participants below (or

above) a certain cut point on a predictor will receive treatment. Assignment to

condition must be carefully specified and tied to the chosen design.

Experimental Control

Any experimental trial should attempt to control all influences on outcome

measures. In a two-condition study, researchers should attempt to control for all

differences between members of each condition other than those specified by the
21
independent variable, the intervention. Randomization, for example, controls for

the preexisting differences among participants in each condition. It allows for the

theoretical assumption that participants in each condition do not differ at the onset

of the study. It does not, however, control for differences during the study. If

participants in the treatment condition, for example, receive instruction from two

teachers and a computer and a single teacher provides instruction to the

participants in the control condition, then the project has not established

experimental control.

Controls other than assignment, then, can be very important. Participants in each

condition should receive nearly identical treatment before and during the study,

except for those differences associated with the independent variable. This includes

demand characteristics of each condition, the format and structure of materials, the

handling of participants by project staff, and so on. Methods for experimental

control will differ substantially by the type of research design.

Independent Variable

The independent variable (IV) defines the intervention conditions. A condition

represents a set of participants who receive one type of treatment. In a typical

randomized controlled trial with two conditions, one condition, the treatment

group, will receive an intervention or treatment. The other condition, the control
22
group, would receive usual care or possibly a placebo to control for demand

expectancy. The description of the intervention should be thorough. It should

include every way that the experimenter manipulates the participants. The control

group must also be clearly described. Does the study call for a placebo or a less

rigorous comparison treatment? And how does the control group differ from the

treatment group?

Thus, the section about the intervention or independent variable should include a

discussion of the intervention condition, a clear description of the control

condition, and an explanation of how they differ. Again, these vary by the research

design, but most designs must include some control condition, also called the

counterfactual, and an intervention of some kind. In a single-subject ABAB design,

the period of time in the A condition is considered the control phase, where only

observations take place. The B condition represents the phase where the treatment

is applied. A description of the independent variable, then, would describe the A

and B phases as well as how the investigator would transition a single participant

between the two.

Dependent Variables and Other Measures

Proposals often include dependent variables (DVs), or outcome measures, as well

as all other assessments in a single “measures” section. Measures may be

23
standardized measures, custom tests, study-specific measures, end-of-chapter tests,

time to complete tasks or subtasks, observations, and so on. Depending on the

design type, measures should include (a) the dependent variables, the outcomes

that the research often preexisting conditions for which the intervention might

work differentially, (c) covariates, such as pretest measures or demographic

variables, (d) blocking variables, which are usually moderators, (e) matching

variables, used to match participants before assignment to condition, and (f)

mediators, variables that intervene between condition and outcomes.

Moderators generally include demographic characteristics or preexisting conditions

within levels of which the intervention may work differently. For example, some

interventions might work differently for students with a reading disability than

students without. Thus, an the presence of an IEP for a reading disability would

represent one moderating variable. Although not often ideal, gender might

moderate the intervention effect if, for example, incentives in the intervention

condition appeal better to girls than boys.

The measures section should also include mediators. Mediators are intervening

variables, and treatment fidelity and dosage represent two common mediators.

Mediators are often those variables that an intervention is expected to directly

impact. In a study testing an intervention intended to provide additional

24
instructional supports, the number of instructional supports used by a student could

be one mediating variable. Students who received the intervention should clearly

use more instructional supports, but those in the control condition might still have

access to some. Nonetheless, condition should clearly predict the differential use of

instructional supports. For all measures, investigators should describe them and

provide reliability and validity statistics. These can come from either previously

published research, as with standardized measures, or pilot work, which might be

demonstrated within the proposal. Some measures will not have reliability and

validity data, such custom, study-specific tests and measures. This section should

then provide a detailed description of the development procedures and

psychometric criteria for establishing reliability and validity.

Methodology of the Study

Primary Source : Interview by e-mails & personal visiting to 25 persons holding

managerial or equal to manager post at various large and small organization After

explaining the concept of financial singling .

Same Size =25

Sources of data

Here the secondary sources of information were used. The secondary sources are:

25
  Web sites
 Books
 DSE & SEC
 Different Business Publication & Notes

Analysis Tools : Analysis and interpretation through tables, Bar diagrams and pie
diagrams.

CHAPTER -5
26
 Limitations

Limitation of the study

As we collected our information through secondary sources, so we have not been able to

collect more information which could give us more clear knowledge about the signaling

theory. While conducting the case on ‘‘Financial Singling ” some limitations was yet

present there:

 Because of time shortage many related area cannot be focused in depth.

 Recent data and information on different activities was unavailable.

 Recent fall of share market that implements some information restrictions.
 As a case analysis, it has been prepared shortly.

27
CHAPTER -6

Financial
Signaling
28
Signal

An action taken by a firm’s management that provides close to investors about how

management views the firm’s prospects is called signal.

Qualities can be almost anything: strength, honesty, genetic robustness,

poisonousness, suitability for bookkeeping employment, etc. We rely on signals

when direct evaluation of the quality is too difficult or dangerous. A bird wants to

know if the butterfly it is about to eat is poisonous before it takes a bite, and relies

on the signal of wing markings to decide whether to eat or move on. An employer

wants to determine before making a hiring decision whether a candidate will be

successful or not, and relies on signals such as a resume, references, and the

candidate’s actions and appearance to predict suitability for the job. A smile can be

a signal of happiness, a wedding ring a signal of being married, wrinkled hands a

signal of age, and a big house a signal of wealth. Our language is full of signals,

both the words we say and the way we say them. Saying “yes, I would like an

extra-big helping of your special Tuna-Delight” can be a signal of hunger or of

29
politeness and the accent with which it is said can signal country of origin and

social class. Indeed, much of our communication, whether it is with words,

gestures, or displays of possessions, consists of signaling cues about who we are

and what we are thinking.

Signals have varying degrees of reliability. Some are quite highly correlated with

the quality they represent: upon seeing such a signal, one can be sure that the

quality is present. Seeing someone lift a 200 lb weight is a reliable signal of

strength; no matter how much a weaker person wishes to signal strength, without

actually possessing that quality he or she will not be able to lift that weight. Others

signals are less reliable and can be imitated by those who wish to give the

impression of having the quality, without actually possessing it. Most people

wearing wedding rings are indeed married, but an unmarried woman may choose

to wear one to signal that she is married to forestall unwanted attention.

Signaling Theory

Signaling theory states that corporate financial decisions are signals sent by the

company's managers to investors in order to shake up these asymmetries. These

signals are the cornerstone of financial communications policy. In economics, more

precisely in contract theory, signaling is the idea that one party conveys some

meaningful information about itself to another party.

30
Signaling theory is concerned with understanding why certain signals are reliable

and others are not. It looks at how the signal is related to the quality it represents

and what are the elements of the signal or the surrounding community that keep it

reliable. It looks at what happens when signals are not entirely reliable – how much

unreliability can be tolerated before the signal simply becomes meaningless?

Signaling occurs in competitive environments. The interests of the sender and the

receiver seldom align exactly, and often they are quite at odds with each other.

Sometimes the competition is fierce and overt, as with prey and predators.

Potential prey may signal to predators that they are poisonous or that they can run

so fast or fight back so strongly that pursuing them is futile. Potential competitors

may signal their strength to each other; if they are unevenly matched, the weaker

may acquiesce and actual battle, which is costly for all, can be avoided. Sometimes

the competition is subtle, as when the signaling is between seemingly congenial

companions. But even within cooperative relationships there are conflicts of

interest about how plans and identity are perceived. I wish to present myself in the

best possible light while you want to know what I am really thinking and what I

really can and will do.

Like it nor not, we all use signaling in our day-to-day lives. It is used probably at

every moment and with everyone. For example:

31
a. Business: Suppose you come up with a product – let’s say ‘Ketchup’. This

Ketchup might be the best ketchup available in the country, if not the entire world.

However, shouting-from-rooftops about this ketchup being the best in the world in

various advertisements wouldn’t help much, since the Ketchup marketplace is

already a crowded one. ‘Tastier than Heinz’ is one approach – relative comparison

which customers will quickly catch on to – that’s one type of signaling. The second

type of signaling might involve money back guarantees, public tasting guarantees

or tying up with a food chain and offering your ketchup as a free add-on. Positive

signaling to increase your business.

b. Corporations: This theory works very well during or near Quarter result

declarations. Statements like ‘Retail sales are holding’; ‘Economy has been weak’

implies that earnings would not meet expectations. As also, is the case with

dividends (giving out dividends consistently may be taken as stable company but

no growth prospects), insider buying (when management of the company starts

buying shares, it is usually a signal that the company is and will be doing well in

the foreseeable future), insider selling (opposite of the previous item) and various

other corporate actions – each signaling or telling us what is about to come. They

may not be 100% reliable, but works most of the time.

32
c. Money: How do you let the world know that you are rich? One way, although

incredibly crazy would be to print out your bank statements and put it up on a

billboard. More often than not, in this case, you are sending out a positive signal

for kidnappers! On a serious note, flaunting a Louis Vuitton bag, driving a Porsche

car, building a huge house etc. are signals to indicate you are rich. You need not

say anything, but your actions speak for it. That’s signaling.

d. At work: ‘Pretending to be busy’, ‘Blocking calendars’ and ‘looking perturbed

and disturbed’ are all classic signals to indicate that you are someone important,

your time is important and you deal with multiple issues in the corporation, even

though you might not be. Trying to hang out with superiors is also a classic signal

that you intend to move up the ladder. There are about a million examples of

Signaling theory at work.

e. Relationships: Last but not the least, signaling theory works brilliantly in

relationships. Does ‘Silence’ ring a bell? ‘What happened dear?’ might be a

question posed to you. If you are silent or even worse, say ‘nothing’, then it’s a

classic signal that you are pissed off at something he/she had done. I presume

almost everyone in a relationship would have a gone through this exact example.

That’s signaling at work – indicating to him/her that he/she better not repeat the act

again.

33
Different Types of Signaling

Some signals are inherently reliable. Here, the cost of simply producing the signal
is prohibitive to one who does not have the quality that the signal is advertising.
These are called,

1. Assessment signals because the form of the signal itself allows the receiver

to assess its reliability.

There are also many signals, especially in human communication, that are not

inherently reliable. These are called,

2. Conventional signals because it is convention, rather than the any essential

characteristic of the signal, that connects its form to its meaning. The

reliability of these signals is externally maintained through the actions of the

community: producing the signal is not itself costly, but a costly penalty is

incurred if one is caught signaling deceptively.

Types of Information

There are two kinds of management information and they are:

34
 1. Symmetric information

Symmetric information is the situation in which investors and managers

have identical information about the firm’s prospects.

2. Asymmetric information

Asymmetric information is the situation in which managers have different

information about their firm’s prospects then they do outside investors.

Financial Signaling

A theory that suggests company announcements of an increase in Financial

payouts act as an indicator of the firm possessing strong future prospects. The

rationale behind dividend signaling models stems from game theory. A

manager who has good investment opportunities is more likely to "signal" than one

who doesn't because it is in his or her best interest to do so.

Over the years the concept that Financial signaling can predict positive future

performance has been a hotly contested subject. Many studies have been done to

see if the market’s reaction to a "signal" is significant enough to support this

theory. For the most part, the tests have shown that dividend signaling does occur

when companies either increase or decrease the amount of dividends they will be

paying out. The theory of dividend signaling is also a key concept used by

proponents of inefficient markets.

35
Dividend theory suggests that dividend is sticky and it can be used to signal quality

of the firms. However, empirical evidences do not strongly support the signaling

efficiency of dividend to future firms’ performance. Specifically, when dividend

surprise is measured in terms of differences from past dividend, empirical research

cannot find strong relationship between dividend surprise in current period and

future firm performance.

Financial signal processing

Financial signal processing is a branch of signal processing technologies which applies

to financial signals. They are often used by quantitative investors to make best

estimation of the movement of equity prices, such as stock prices, options prices,

or other types of derivatives.

Have you ever lost money in investment ? If you have, do you know what

Newton's thoughts on investment loss were ? And how did Newton's reflections on

investment hint the beginning of the application of physics and science concepts to

investment practices ? Do you know that the mad behavior of people in investment

bubbles may be partially understood with science concepts, such as entropy and

phase transitions ?

This article touches upon questions. From Newton's reflection on investment

bubbles, this article introduces connections between physics, communication

36
technologies and investment; focusing particularly on the ways in which physics

concepts influence modern communication technologies, financial theories and

investment industries. Two major connections are particularly worthy of our

attention because of their importance in investment: the connection between

entropy and quantitative investment, and the connection between heat diffusion

equation and the financial crisis. This article also points out how prominent

scholars like Isaac Newton, Ludwig Boltzman, Claude Shannon, Jim Simons and

many others have shaped the investment fields. The fields still have lots of

challenging and important open questions to be explored. Among these open

questions, this article raise a question if the formation of a financial bubble can be

modeled similar to critical phenomena in many body physics.

Lucky Option Buyer Example: If you are able to buy 1000 contracts of the

above call option, each contract corresponding to 100 shares of stocks, then when

the stock price reaches $50, your investment will become (50-40)*100,000= $1

million, and you will only have to pay $2000 (ignoring the transaction fee) for

these options ($2000 = 100,000*0.02).

Options can be considered as a kind of insurance. The gain in this example is

similar to an insurance gain. Someone bought an insurance policy from an

insurance company, and later on, the insurance company paid the policy holder a

large sum of money.

37
Since you make almost $1 million gain from this investment, it is clear that the

option seller lost about the same amount of money. It could naturally be asked why

the option seller sells the options at this price. An answer to this question would be

that the option seller believes it is almost impossible for the stock price to reach

$50 that time frame. If he thinks that there will be a greater probability that the

stock price can reach $50, he will demand a higher price for this option. Of course,

if his asking price for the option is too high, there will be no buyer.

Assumption

Signaling theory is based on the assumption that information is not equally

available to all parties at the same time, and that information asymmetry is the rule.

Information asymmetries can result in very low valuations or a sub-optimum

investment policy

The main idea of Financial signaling :

Signaling theory is an idea of decision making of a firm’s financing. So the main

idea of signaling theory is given below:

1) Firm will finance from its own fund that means from internal source;
2) Internal sources are Retained Earnings, Reserve Fund, and Accumulated

Fund etc.
3) Financing from internal sources are more secured than external because cost

of capital in internal source is less than external;

38
4) If financing is not possible from internal source than it will be collected from

external.

39
CHAPTER -7

Case Studies

40
 Case Study-1

MM assumed that investors and managers have the same information. But,

managers often have better information. Thus, they would:

 Sell stock if stock is overvalued.

 Sell bonds if stock is undervalued.

And investors understand this, so view new stock sales as a negative signal. In this

topic, we briefly discuss signaling theory. But, before we begin our discussion of

signaling theory, why would a firm be interesting in signaling? In general, a firm’s

managers use signals to reveal information to the public about firm value.

Managers have the incentive to signal if:

1) They have private information about firm value and the public does not (i.e.,

information asymmetry)

2) The private information is “good” news (therefore, the signal will reveal this

good news to the public)

3) Bad firms can’t (won’t) imitate

4) Managers cannot credibly disclose the positive information without the

signal (i.e., they can’t simply hold a news conference).

In corporate finance, signaling models have been used (as the textbook

describes) to explain the level of investment by an entrepreneur in a firm, debt

versus equity choices, the size of dividends, and stock splits. The textbook splits its

discussion between “costly” (with exogenous costs) and “costless” signals (with
41
endogenous costs). With either type, the signal is meant to separate good firms

from bad firms.

Our discussion centers on one of the foundational papers in “costly” signaling

theory: Spence, Michael, “Job market signaling,” Quarterly Journal of Economics

87 (1973), 355-374. In the Spence model, hiring an employee is viewed as an

investment decision with uncertainty concerning the employee’s value. The cost to

the firm is the wages paid. The value to the firm is the employee’s marginal

product (i.e., marginal contribution) to the firm.

Assumptions:

1) Employer cannot directly observe the potential employee’s (i.e., applicant’s)

marginal product

2) Employer can observe the attributes of the applicant that are related to

his/her marginal product (education, work experience, age, sex, race, height,

etc.)

3) Some attributes are fixed (age, sex, race, height), some are not (education,

work experience)

4) Fixed attributes are termed “indices,” those subject to change by the

applicant are termed “signals”

5) Signals are costly and are negatively correlated with the applicant’s

42
 productive capability. That is, the signal is less costly for applicants with

greater productive capabilities.

6) Employer uses indices and signals to determine the wage rate

7) Employers are risk neutral who offer wages equal to the applicant’s expected

marginal product

8) Employer beliefs about the value implied by the indices and signals can

change through time as new data is received

Since the applicant can’t alter indices, the only thing they can do to affect the wage

rate is to alter their signals. (Spence focuses on the education signal.) The amount

of education acquired by applicant is the amount that maximizes the difference

between the offered wages and the cost of education (the signaling cost). Education

costs include dollars (tuition), time, mental strain, etc.

Assumption 5 is critical to an effective signal. What would happen if the signal

was equally costly to all applicants?

Information feedback loop

1) Employers have conditional probabilistic beliefs about the relation

between indices / signals and applicants’ marginal product

2) Employer offers wage schedule (a function of indices and signals)

43
 3) Signaling decisions are made by applicants (taking into account signaling

costs)

4) Employer hires applicant, observes relation between indices/signals and

marginal product and updates beliefs

Spence (1973) describes a signaling equilibrium in which new incoming data is

self-confirming (so no update in beliefs). That is, employers set the wage schedule

that induces applicant signaling decisions. Employers then hire and the marginal

product of the employees is as expected.

Example one:

1) One employer

2) Two types of applicants: Type one have low marginal product (= $1), the

other have high marginal product (= $2).

3) Proportion of group one: q, proportion of group two: 1-q

4) Signal = education. Signaling costs:

Group one: cost of education of level y = y

Group two: cost of education of level y = y/2

5) Education does not change the applicant’s marginal product

44
 To find equilibrium, set initial probabilistic beliefs or signals, then determine if

they are confirmed. For example, assume that the employer’s probabilistic beliefs

are:

6) If y < y*, then productivity = $1 (with probability 1), if y  y*, then

productivity = $2 (with probability 1). So the employer offers wages of $1 to

applicants with y < y* and wages of $2 to applicants with y  y*

7) Applicants will respond by either obtaining education level 0 or y * (why

only these two levels?)

8) For employer beliefs to be confirmed, then all applicants from group one

must obtain education level 0 and all applicants from group two must obtain

education level y*

9) Each groups sets y to maximize the difference between wage and signal cost

– diagramed in figure 2

10) Education selected by applicants is self confirming if:

For group one: $1 > $2 - y*

For group two: $2 - y* / 2 > $1

11) Putting these two conditions together: $1 < y * < $2. Note – any y * in

that range is in equilibrium, but not equivalent in terms of welfare. For

example, how do members of group one and two think about increasing y*?

45
12) Proportion of individuals in each group does not affect the

equilibrium.

13) If signaling is not allowed, then wage rate for all applicants is: $1q +

$2(1 - q) = $2 – q. For example, if q = 0.4, then wage rate = $1.6.

a. Group one prefers no signaling.

b. Group two prefers signaling or no signaling depending on the values

for y* and q. Remember, groups two’s net return is $2 - y * / 2. Also

remember that $1 < y* < $2. So, if q  0.5, then group two is worse off

by signaling.

14) In general, if y* < 2q, then group two is better off in a signaling

environment. So, higher q increases benefit to signal for group two, higher

y* decreases the benefit from signaling.

15) Even more in general, if a1y is the signaling cost for group one and a 2y

is the signaling cost for group two, then: group two is better off in a

signaling environment if q > a2 / a1.

46
Example two:

1) Employer beliefs are:

If y < y*, then group one (productivity $1) with probability q and group two

(productivity $2) with probability 1-q.

If y  y*, then group two (productivity = $2) with probability 1

2) Levels of y selected are still either 0 or y*.

3) Wage rate is set at $2 – q for y = 0 and $2 for y = y*.

4) Assume y* set greater than 2q. Then both groups select y = 0.

Group one:

y = 0, then net wage = $2 – q (select this)

y = y*, then net wage = $2 – y*

Group two:

y = 0, then net wage = $2 – q (select this)

y = y*, then net wage = $2 – y*/2

5) This is “in equilibrium” because employer’s beliefs are confirmed (i.e., the

wage paid for y = 0 is equal to the marginal product, on average). That is,

once this wage schedule is set, no new data will be released to alter the

47
 employer beliefs.

6) Yet, no information is provided in this equilibrium.

Example three:

1) There is also a signaling equilibrium in which all participants pick y = y *. To

get this equilibrium, employers believe:

If y < y*, then group one (productivity $1) with probability 1.

If y  y*, then group one (productivity $1) with probability q and group two

(productivity $2) with probability 1-q.

2) Wage rate is set at $1 for y = 0 and $2 – q for y = y*.

3) These beliefs are self confirming if y* set less than $1 – q.

4) In this equilibrium, everyone gets educated to improve their wage rate, but

education provides no information about productivity.

Some closing observations and conclusions:

1) A negative correlation between signal cost and productivity (or value) is a

necessary condition for a signal.

2) However, simply having a negative correlation between signal cost and

productivity doesn’t imply that people will signal (e.g., if education can only

be acquired at levels 1 and 3). Thus, there has to be a sufficient number of

possible signals across the cost range.

48
3) Multiple equilibrium are possible, with some inferior to others (e.g., setting

y* greater than a bit over 1 in example 1)

4) Sometimes everyone loses with signaling. Sometimes some people win and

others lose.

49
 Case Study-2

The Policy Support Instrument

The Policy Support Instrument (PSI), introduced in October 2005, enables the IMF to

support low-income countries that do not want—or need—Fund financial assistance. The

PSI helps countries design effective economic programs that, once approved by the IMF's

Executive Board, signal to donors, multilateral development banks, and markets the

Fund's endorsement of a member's policies.

Policy support and signaling

In recent years several low-income countries have made significant progress toward

economic stability and no longer require IMF financial assistance. However, while they

may not want—or need—Fund financial support, they might still seek ongoing IMF

advice, monitoring and endorsement of their economic policies—what is called policy

support and signaling.

“Signaling” refers to the information that Fund activities can indirectly provide about

countries' performances and prospects. Such information can be used to inform the

decisions of outsiders. Outsiders can include private creditors, including banks and

bondholders, who are interested in information on the repayment prospects of loans;

official donors and creditors, both bilateral and multilateral, who may be interested in

reassurance about the countries they are supporting; and the public at large. In low-

50
income countries, such signals previously have been sent mainly in the context of the

IMF's Poverty Reduction and Growth Facility (PRGF), and the related Poverty Reduction

Strategy (PRS) process.

As countries' circumstances change, so too must the Fund's support. The PSI, as a

complement to the PRGF, and the Exogenous Shocks Facility (ESF), offers an additional

way for the Fund to provide policy support and signaling to its low-income members.

Key features of the PSI

The PSI aims to:

(i) promote a close policy dialogue between the IMF and a member country;

(ii) provide more frequent Fund assessments of a member's economic and financial

policies than is available through the regular consultation process, known as surveillance;

and

(iii) deliver clear signals on the strength of these policies. The PSI is voluntary, demand-

driven, and intended to be supported by strong country ownership. Therefore, it will

be available only upon the request of a member. Among some of the key features:

• Program targets and structural reforms should be based upon a country's poverty

reduction strategy to help ensure policy ownership.

• Programs should meet the same high standards as under a Fund financial arrangement.

51
• PSIs will have a fixed schedule of reviews to assess program implementation, with
reviews normally scheduled semiannually. Only limited flexibility will be allowed in the

timing of the reviews, and the Board will conduct reviews irrespective of the status or

prospects of program implementation.

• The provision of timely and accurate information from the member with a PSI will be

essential for the Fund's assessments. A framework for dealing with possible cases of

misreporting will be in place to safeguard the integrity of IMF assessments.

• In the event of a shock, an on-track PSI could provide the basis for rapid access to

PRGF resources through the ESF.

• The publication of PSI documents is voluntary, but presumed. This is a similar policy to

the one in effect for PRGF documents.

52
 CHAPTER -8

Comparative
Study

Comparative Study

A Can Signals Be Trusted?

53
The preceding evidence does not demonstrate that managers can manipulate stock prices

by consistently misleading investors. For both types of distributions, false signalling is

punished. Our analysis of subsequent dividends illustrates that dividends are habit-

forming. If the market does not receive its expected dosage, the stock price will suffer

withdrawal symptoms. Establishment of a dividend program generates expectations of

future dividends. Management is forced to submit to investors' anticipation of a periodic

signal. Whenever management is unable or unwilling to fulfill these expectations, the

stock price will fall. Although not examined in this article, our study and others find

substantial reductions when dividends are cut.8 These reductions are generally greater

than the gains from initiating and increasing dividends. Moreover, if management pays

out excessive dividends, it could replace the funds with a new equity issue. As we shall

explore later in this paper, equity issues reduce stock prices, and this negative reaction

encourages management to limit dividend payout to a sustainable level. Other costs to

false signalling with dividends include the possible adverse effects of altering investment

and capital structure policy in an attempt to sustain an excessive dividend payout. Similar

retribution should be suffered in response to false signalling with repurchases. As

subsequent events inevitably reveal the truth, the stock should fall below its pre-

announcement price, reflecting the premium given away in the tender offer. The costs

associated with replacing the funds paid out in repurchase.

Equity Issues as Negative Signals

54
The decision to sell equity is made by executives who possess an insider's knowledge of

the firm, its current performance and future prospects. When the current stock price is

high relative to managers' assessment of the firm's prospects, there is a powerful

incentive to sell stock to benefit the firm and its existing shareholders. This incentive is,

of course, simply the mirror image of the incentive to repurchase stock when managers

view their stock as underpriced. Conversely, when management believes the firm's shares

are underpriced, there is an incentive to avoid issuing equity even if the firm has

worthwhile projects to finance. To protect themselves against the risk of buying

overvalued shares, investors mark down the stock price in response to the announcement

that management is willing to sell equity. Indeed, this sort of price hedging is common in

any trading situation where some participants are viewed as having superior information

Of course, the firm selling equity may simply be raising funds to finance a very profitable

investment project. Because of the information imbalance between investors and

managers and investors' vulnerability to this imbalance, there may be no credible way to

convince investors of management's laudable motive for issuing equity.19 Moreover, new

equity issues are typically a relatively small percentage of the existing shares outstanding.

New shareholders are investing primarily in the valuation of the firm's existing assets

rather than the specific investment project funded by the sale. Regardless of the outcome

of the project, new investors' returns will be determined primarily by the future

performance of the firm's existing businesses. Investors have little recourse if they

purchase overvalued shares. Thus, an equity issue is viewed by the market as a negative

signal. The stock price reduction is produced by investors hedging against the risk that, in
55
selling stock, informed managers are responding to the incentive to capitalize on a

favorable market valuation.

A more benign interpretation is that the information available to management is not so

favorable as to preclude selling stock at the going price, and thus the decision to issue

equity is a negative signal. This signalling explanation is consistent with our empirical

findings. The size of the equity issue represents the size of the signal. Investors fear that

management's willingness to sell a large fraction of the firm's equity reflects their

assessment that the stock price is especially favorable relative to their superior

information. The variability of the negative market reaction to equity issues through time

and across firms reflects the varying information content of equity issue decisions.

Negative reactions to secondary distributions and insider sales suggest that whether

managers sell equity for their own account or for the firm's account, investors are

concerned about the implications of the decision.

The signalling rationale is also consistent with the firm-specific timing pattern observed

in our empirical work. The decision to sell stock follows a period of superior stock price

performance. The decision to sell equity now, rather than wait for additional price

appreciation, suggests that management does not foresee continued superior performance.

Finally, the signalling story is consistent with another aspect of management's attitude

toward Financial Issues. When queried about their reluctance to issue equity, managers

explain that this reluctance stems from the inappropriately low valuation placed upon

their shares by the market.20 With this attitude as a backdrop, it is not surprising that
56
investors fear that a decision to sell equity reflects the temporary reversal of this

assessment.

What Signals do?

What, exactly, is a signal? It is useful to define what exactly we mean by signals,

especially because different authors have used the term in different ways and there has

been considerable ambiguity and disagreement about terms. (Hauser 1996) The

definition I will be using is that a signal is a perceivable action or structure that is

intended to or has evolved to indicate an otherwise not perceivable quality about the

signaler or the signaler’s environment. I.e., the purpose of a signal is to indicate a certain

quality.

Not everything that we use to infer hidden information is a signal. Cues are "any feature

of the world, animate or inanimate, that can be used … as a guide to future action”

(Maynard Smith and Harper 2003). Cues need not be intentional and the information

gleaned from a cue may not be beneficial to person or animal producing the cue. The

costs that make a signal reliable must be in the domain of the quality that is being

signaled. In the animal kingdom, these costs are often in the form of energy or exposure

to danger. The antlers on a strong bull moose can weigh up to 60 lbs.; they are a reliable

signal of strength because a weaker animal would be unable to carry this weight. Another

example is the peculiar behavior of gazelles when they spot a predator. Instead of running

off immediately, strong gazelles will jump up and down in place, displaying a behavior

called stotting that is wasteful of time and energy. This has been interpreted as a costly
57
signal of fitness, for only a truly fast and fit gazelle could afford this wastefulness before

running off. Predators know this, and generally do not go after these bouncing creatures,

choosing instead a weaker and easier prey. This display benefits both the predator and the

strong gazelle, saving both a long and exhausting pursuit.

In the human world, costly signals take many forms, with money and time being among

the most common. Signaling wealth through the display of expensive possessions is an

obvious one: driving an extravagantly expensive car and wearing a lot of jewelry is a

costly signal of wealth – it says that the owner of these goods has so much money he can

waste a lot of it on these non-essential goods. Signaling status through the display of

time-wasting pastimes is an interesting example that was raised by Veblen. He noted that

displaying leisure is an important signal of status, of membership in the class of those

who need not toil endlessly at some income-producing enterprise. Yet an abundance of

leisure cannot be directly observed, for not very many people will watch you do nothing,

day after day, year after year. Veblen proposed that the time-consuming acquisition of

impractical accomplishments was a way of displaying leisure, and he listed among such

accomplishments the ability to speak a dead language, knowledge of proper spelling, the

occult sciences, and fashion and the breeding of fancy dogs (Veblen 1899). Someone with

less financial resources would need to use much of their time in gainful employment;

only someone with the leisure that comes with wealth would be able to display such

accomplishments.

58
Not all assessment signals (signals that are inherently reliable) are costly for the honest

signaler. Indices are signals whose form is directly correlated to having a particular

quality . Although they are not costly to produce if one has the quality, they are

impossible to produce without it. Maynard-Smith and Harper use the example of a tiger

signaling its size by scratching on tree. A big tiger will scratch high up, while it is

effectively impossible for a smaller tiger to reach up and scratch so high. Thus, high

scratches are a reliable signal that one is in the territory of a very big tiger.

Somewhat facetiously, Maynard-Smith and Harper noted that this index would cease to

be reliable if little tigers figured out how to stand on boxes. While such end-runs are

uncommon in the animal world, they are ubiquitous in the world of humans. People are

ingenious, and for most signals, there will be ways that someone, somehow, will find a

way to fake a seemingly unfakeable signal. Unlike tigers, we can always find a way to

stand on a box to seem taller, to bleach our hair to be blonder, to borrow an impressive

car.

Although it is more costly for the deceptive signaler to make this end-run than for the

honest signaler to display the cost-free index, the key equation is the balance between the

deceptive signaler’s perceived

benefit and the cost of producing the signal. If the signaler believes that the benefit will

outweigh the cost, he or she will be motivated to display the signal. Similar end-runs can

erode the reliability of costly signals, too. A winter tan is a costly signal of wealth and

59
leisure: it is a signal that one has bountiful time and money, enough to vacation

somewhere warm, sunny and far away. For a while, it was a fairly reliable signal.

Humans are inventors, and inventing cheaper and easier ways to signal a desirable

quality – often in the absence of that quality – is a driving force behind much creative

design.

Conventional signals

Not all signals are costly or inherently tied to the quality they are indicating. Many

signals are arbitrary, indicating a particular quality through convention rather than

because of any causal or cost relationship. In the animal kingdom, certain sparrows signal

their place in the hierarchy with badges of status – black markings on their chests. These

non-costly signals, often termed conventional signals, are very common in the realm of

human communication. I may, for instance, choose to indicate that I am a serious bike

rider by wearing a full outfit of cycling gear; but buying these clothes, while financially a

bit pricey, does not require paying any costs in the domain being signaled, in this case of

cycling prowess. Such conventional signals are not inherently reliable – and indeed there

are novice cyclists and non-athletes who a sport a full Tour de France outfit. Yet the

signals must be sufficiently reliable that they remain meaningful: if sparrows with status

badges were no more likely to be of high status than those without, or cycling gear only

occasionally correlated with biking ability, the signals would not convey information

about the underlying quality . Since they have no inherent cost to keep them honest, if

60
giving such a signal is advantageous for those without the underlying quality, what

prevents there from being so many deceptive

Signalers that the signal becomes meaningless?

By themselves, conventional signals are open to deception. If no external force keep this

in check, they can quickly become meaningless. However, conventional signals can be

quite reliable - if there is a penalty imposed on deceptive signalers who are detected. The

reliability of conventional signals is externally determined, by the punitive actions of the

receiver or others who are harmed by the deceptive signal. These include honest signalers

who are defending the reliability and validity of their signal, other potential receivers of

the signal, and the receiver’s network of ties, who may feel personally affected by harm

done to the receiver. If the signaler is not identifiable, any punishment must be made

immediately. Otherwise, the receiver’s memory, community and communicative ability

determine the temporal and social extent of the penalty.

We can demarcate the types of penalties by these features:

- Immediate penalty: the deception is recognized immediately . Here, the receiver must

simply be capable of punishing the deceptive signaler .

- Subsequent penalty: the deception is discovered later. Here, the receiver must be able to

recognize and be capable of punishing the deceptive signaler

- Communal penalty (reputation): the deception is penalized by others. Here the receiver

must be able to communicate with others to indicate that the signal is not to be trusted. It
61
must be possible to communicate the identity of the signaler, and the community must be

motivated and capable of imposing a punishment.

Interrelated Corporate Financial Decisions with signaling

An important source of the credibility of dividend and repurchase signals is the negative

market reaction produced by equity issues and dividend reductions. This negative impact

on stock prices associated with equity cash inflows imposes a cash flow constraint on

firms. Even though dividend increases and stock repurchases are received as good news,

firms that pay out excessive equity cash flows may later have to replace the funds paid

out with new equity financing or a reduction in dividends. The negative impact on stock

prices of equity issues and dividend reductions constitutes a substantial "cost to false

signalling," which keeps management honest and adds credibility to dividend and

repurchase signals. The constraints imposed by the information imbalance between firms

and investors have important implications for corporate financial decisions. It should be

apparent that decisions concerning dividends, repurchases, and equity issues are

interrelated. These decisions must be determined jointly to avoid paying the cost inherent

in violating the cash flow constraint and reducing dividends and/or issuing equity.

More generally, the information-induced barrier between the firm and the capital markets

helps bind the firm as an entity separate from the capital markets. It also binds the firm's

major financial decisions and forces the simultaneous s determination of investment

policy, capital structure policy, and dividend policy. The necessity of jointly determining

financial policies is mandated by the constraint imposed by the negative market reaction
62
to external equity financing. This leads to policies that differ from those predicated on the

assumption that a firm can always issue equity at the current stock price. Were this

assumption valid, decisions could be determined incrementally and independently.

63
CHAPTER -9

DATA

ANALYSIS

64
 Data Collection and Management

Many investigators describe, often briefly, their data collection and data

management procedures. For example, how will research staff track participants

across time, maintain data integrity and security, manage demographic

information, organize the data, and so on? Participant may be tracking with

identification numbers, with data organized into a set of spreadsheets or a database.

Often identification numbers are stored separately from participant data, as are

consents. This section allows the team of investigators to establish that they know

how to work with data and keep it secure.

Analysis Methods

Data analysis methods vary considerably from and even within the types of

research designs. Some methods, such as single-subject designs, do not necessarily

need a statistical analysis to convey experimental control over the dependent

variables. Most “quantitative” designs, such as randomized trials and many quasi-

65
experimental designs, require a statistical analysis. Quantitative designs can vary

from one or two assessments in time to longitudinal data collection with numerous

assessments across several years. They might assign individual participants to

condition or intact clusters of participants, such as classrooms or schools. The

analyses may need to compare two or more conditions or pretest assessments to

posttest assessments.

In general, the statistical analysis must answer the research questions or address the

research hypotheses in a manner that accounts for the overall design of the study.

Thus, an analysis section should (a) state or paraphrase the research questions or

hypotheses, (b) review key features of the design, (c) describe the analytical

approach in detail, (d) address the number and type of tests and study-wide Type I

error rate, (e) report a power analysis and describe all assumptions, (f) express how

the analysis will account for attrition and other missing data, and (g) list the

software that the analysts expects to use for the analyses.

Conclusion

The findings of this assignment reconcile dividend signaling theory with risk

management theory. We contribute to the dividend signaling literature by

emphasizing the interaction between corporate risk management policy and

66
dividend policy. The interaction between these two corporate policies has received

less attention in the literature despite their common link to information asymmetry.

Table 1.1 Clarity about singling

Response Respondent
Yes 22
No 1
Not much clear 2

Interpretation : After explaining the concept of singling 22 persons understand the

concept 1 person was not clear and there are 2 such persons which were not so sure

regarding the concept.

67
Table 1.2 Signals plays vital role in daily life

View Respondent
Yes 23
No 2

Interpretation : It clear from the above diagram that 23 persons out 25 admit that

signals plays an important role in our day to day life there only 2 persons who are not

agree with the concept.

Table 1.3 Signals plays an important role in business

68
Views Respondent
Strongly Agree 21
Agree 3
Disagree 1
Strongly Disagree 0

Interpretation : Above diagram shows that 21 persons are strongly agree with the

concept that signals plays an important role in business and another 3 persons are also

agree with it and there is only 1 person which is not agree with it.

Table 1.4 Have you ever make any decision through signals

Views Respondent
Yes 23
No 2

69
Interpretation : Above diagram shows that 23 persons are agree with the concept that

they take various business decisions with the help of signals and there are only 2 persons

which are not agree with it.

Table 1.5 Signals plays an important role in financial decision making

Views Respondent
Strongly Agree 20
Agree 3
Disagree 1
Strongly Disagree 1

70
Interpretation : it is clear from the above diagram that 20 managers are strongly agree

with the concept that signals are helpful in financial decision making another 3 persons

are also agree with the concept.

Table 1.6 Do you have ever caught any negative financial signal ?

Views Respondent
Yes 23
No 2

71
Interpretation : It is clear from the above table and diagram that there can be some

negative financial signals and maximum number of persons at managerial level admit the

fact.

Table 1.7 A Decision taken by positive financial signaling lead your

organization to earn huge profit ?

Views Respondent
Yes 17
No 5
Neutral 3

72
Interpretation : Above diagram shows that 17 persons out of 25 admit that their

organization earn huge profit on the basis of financial signaling and 5 persons are not

agree with the concept and 3 persons were neutral.

Table 1.8 According to you what is the scope of financial signaling

Views Respondent
Bright 4
Very Bright 17
Dull 4

73
Interpretation : Above diagram shows that 17 persons out of 25 admit that future of

financial Signaling is very bright and 4 other says that it’s future is bright and there are

only 4 persons which says that the future of financial signaling is dull.

Table 1.9 Have you ever faced any loss due to Negative Financial Singling.
Views Respondent
Yes 2
No 21
Not Answered 2

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Interpretation : The above diagram indicates that if a wrong decision is taken by

negative signal then it can cause losses and 84% persons says that they never face such

situation in their lives. And 8 % were agreed with it.

Table 1.10 Over it can be said that financial signaling can play a vital role in
the filed of financial decision making such as dividend policy, budgeting policy
etc .
Views Respondent
Yes 22
No 1
Neutral 2

75
Interpretation : It is very much clear from the above diagram that 22 persons out of 25

are agreed with the concept that financial signaling plays an important role in financial

decision making and hence it is an healthy sign towards the scope of financial signaling.

76
CHAPTER -10

FINDINGS

Findings

1. It was found that the concept of financial signaling was not a familiar

concept but after explaining it almost every person at managerial level admit

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 that financial signaling plays an important role the filed of financial decision

making.
2. It is clear from above study that dividend signaling and budgetary decision are

also depends upon financial signaling.

3. It was found that there is direct relation between signaling and financial

decisions.
4. It was also found that signal directly effects to business as they may positive

or negative.
5. It was also found that scope of financial signaling is very bright as a separate

filed of finance.

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 CHAPTER -11

CONCLUSION

Conclusion

Although the results reviewed in this study provide useful insight to financial decision

makers, this work does not constitute enough progress on how managers should make

equity cash flow decisions on the basis of financial decision signaling . More progress on

this front requires going behind corporate decisions to investigate how and why decisions

are made and why some decisions are favorably received by the capital markets and
79
others poorly received. As it is also clear that scope of financial Signaling is very bright .

Future research needs to focus on the interrelated nature of major financial decisions how

financial policies are reconciled within the constraints that bind firms' decisions.

This future research will be more difficult than measuring the capital markets' reaction to

corporate decisions. But, the payoff promises to be correspondingly greater as well. The

work to date does constitute important progress toward solving the equity cash flow

puzzles and provides a foundation for future research designed to improve corporate

financial decision making. At last it can be concluded that Financial signaling has a

positive scope and hence it should be given proper emphases by Govt. and other

educational authority as a separate module.

80
CHAPTER -12

BIBLIOGRAPH

81
 Bibliography

Books:

 Essentials of Managerial Finance, Scott Besley and Eugene F.

Brigham.
 Asquith, P., and D. Mullins, (1983) \The Impact of Initiating

Dividend Payments on Shareholders ‘Wealth" Journal of Business

56: 77-96.
 Charest, G., (1978) \Dividend Information, Stock Returns and

Market E_ciency - II." Journal of Financial Economics 6: 297-

330.

a Websites:
 http://www.swlearnig.com
 http://en.wikipedia.com/signaling_theory
 http://www.ask.com/ signaling theory
 http://www.investopedia.com

82
 ANNEXURE

Questionnaire
Name : ______________________________________

Age : ______________________________________

Gender : Male Female

Designation : ______________________________________

Area of Activity :_______________________________________

Q 1. Are you clear about singling ?

83
Yes
No
Not much clear
Q2. Are Signals plays vital role in daily life ?
Yes
No
Q3. Signals plays an important role in business
Strongly Agree
Agree
Disagree
Strongly Disagree
Q4. Have you ever make any decision through signals
Yes
No

Q5. Do You think Signals plays an important role in financial decision making ?
Strongly Agree
Agree
Disagree
Strongly Disagree
Q6. Do you have ever caught any negative financial signal ?
Yes
No
Q7.Decision taken by positive financial signaling lead your organization to earn huge profit
Yes
No
Neutral
Q.8. According to you what is the scope of financial signaling
Bright
Very Bright
Dull
Table 1.9 Have you ever faced any loss due to Negative Financial Singling.
Yes
No
Not Answered
Q 10. Over it can be said that financial signaling can play a vital role in the filed of financial decision
making such as dividend policy, budgeting policy etc .
Yes
No
Neutral
84
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