Analyzing the Corporate Financial Signaling Theory in Order to Manage Information Asymmetry

Document Type : Original Article

Authors

1 ِDepartment of Management, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran.

2 Associate Prof, Department of Management, University of Isfahan, Isfahan, Iran.

3 Professor, Department of Economics, University of Isfahan, Isfahan, Iran.

Abstract

The theory of signaling indicates the role of the signal in the management of the company's stock market. Information asymmetry that cannot be removed for confidentiality reduces shareholders` wealth. But by sending a signal (dividend ratio, debt ratio, ownership concentration), the relationship between information asymmetry and discount rate is adjusted, leading to increasing the wealth of shareholders. Due to the cost of signaling for companies, error signaling strategy that do not benefit the shareholders, reduces the shareholders` wealth. Using three corporate financial signals, three required return proxy and one information asymmetry proxy, 18 information asymmetry management strategies were designed and tested. With the information of 300 companies listed on the Tehran Stock Exchange and the OTC market of Iran from 2008 to 2020, the difference between the relationship of information asymmetry (PIN) and the cost of capital between signaled and not signaled companies was studied. The results indicate that debt ratio and ownership concentration signals have been able to moderate the relationship between the discount rate resulting from the Gordon model and information asymmetry. In addition, the dividend ratio signal has been able to moderate the relationship between the discount rate of CAPM and information asymmetry.

Keywords

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Financial Management Perspective
Volume 11, Issue 36
December 2021
Pages 145-172

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