How Dividend Signaling Changes Market Valuation in UK Telecommunication Industry - Dissertation Example

In terms of predicting the future profitability and earnings of a business organization or the market valuation of the industry, the dividend is considered as one of the most significant topics in corporate finance. Even though one may think that a higher dividend would mean a better market valuation on the part of the business enterprises, several past and current empirical studies suggest that a significant dividend increase will not lead to the development of a better market perspective on the part of the company (Grullon, Michaely and Swaminathan 2002; Benartzi, Michaely and Thaler 1997; DeAngelo, DeAngelo and Skinner 1996).

Specifically, the research study of Grullon, Michaely, and Swaminathan (2002) revealed that there is not much or no concrete financial evidence that could prove that changes in dividends can help financial analysts predict a positive movement in the trends of the corporate earnings. Upon interviewing and surveying a large group of financial executives, Brav et al. (2003) reported that there are many cases wherein the financial managers will not agree to the idea that dividends can be used as an accurate device in predicting whether or not the business profit of a company or market valuation would either increase or decrease.

Contrary to the research findings of Brav et al. (2003) and Grullon, Michaely, and Swaminathan (2002), Nissim and Ziv (2001) argued that one of the main reasons why most financial analysts do not agree with the idea that there is a close link between dividends and a significant changes in the future corporate earnings is because most of the past researchers were using an ineffective model in detecting or controlling the possible changes in the corporate earnings and business profitability. An increase or decrease in dividend payouts does not necessarily mean that a telecommunication company is at risk of bankruptcy.