"Dividends and Signaling" --What is it's meaning and implications ?

A theory that suggests company announcements of an increase in dividend 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.

Dividend signaling is a theory in economics that a company’s dividend announcements provide information about future earnings. Under this theory, if a company indicates that dividends will increase, this means it anticipates higher earnings in coming years. Researchers have extensively studied dividend announcements and financial records to determine whether this theory holds true in practice. The results of their research have been mixed, indicating that while dividend signaling can be a predictive tool in some cases, in others it may more accurately reflect past economic developments.

Dividend signalling-This is a theory which asserts that announcement of increased dividend payments by a company gives strong signals about the bright future prospects of the company.An announcement of an increase in dividend pay out is taken very positively in the market and helps building a very positive image of the company regarding the growth prospects and stability in the future.Generally, dividend signaling is done by the company when it changes the amount of dividend to be paid to shareholders.