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An empirical test of signalling theory

An empirical test of signalling theory This study aims to support and extend signalling theory because of information asymmetry. This study also aims to answer the call to further negative signalling and explore immediate reactions to signals, thus alleviating a gap with regard to temporality of signalling.Design/methodology/approachThe study used two separate data sources, the S&P 500 and 51,500 pages of the public papers between 1981 and 1999, nearly 20 years of data. Inter-rater reliability, controlled for all macroeconomic announcements identified in the literature, is used, and the data are empirically tested using generalized autoregressive conditional heteroscedasticity (GJR-GARCH) modelling.FindingsIn accordance with signalling theory and the efficient market hypothesis, the study found that receivers do react to positive signals from a credible insider signaller to obviate information asymmetry. In line with previous research, the study also finds that receivers react much stronger to negative signals.Practical implicationsInvestors, financial managers and top executives responsible for their stock price need to focus on presidential signalling as these directly affect market volatility. In particular, investors and financial managers can predict stock price volatility based upon signals from the president.Originality/valueThis is the first research study that explores the correlation between presidential signalling and market volatility. This study is important for investors and financial managers. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Research Review Emerald Publishing

An empirical test of signalling theory

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2040-8269
DOI
10.1108/mrr-08-2019-0338
Publisher site
See Article on Publisher Site

Abstract

This study aims to support and extend signalling theory because of information asymmetry. This study also aims to answer the call to further negative signalling and explore immediate reactions to signals, thus alleviating a gap with regard to temporality of signalling.Design/methodology/approachThe study used two separate data sources, the S&P 500 and 51,500 pages of the public papers between 1981 and 1999, nearly 20 years of data. Inter-rater reliability, controlled for all macroeconomic announcements identified in the literature, is used, and the data are empirically tested using generalized autoregressive conditional heteroscedasticity (GJR-GARCH) modelling.FindingsIn accordance with signalling theory and the efficient market hypothesis, the study found that receivers do react to positive signals from a credible insider signaller to obviate information asymmetry. In line with previous research, the study also finds that receivers react much stronger to negative signals.Practical implicationsInvestors, financial managers and top executives responsible for their stock price need to focus on presidential signalling as these directly affect market volatility. In particular, investors and financial managers can predict stock price volatility based upon signals from the president.Originality/valueThis is the first research study that explores the correlation between presidential signalling and market volatility. This study is important for investors and financial managers.

Journal

Management Research ReviewEmerald Publishing

Published: Nov 13, 2020

Keywords: Leadership; Signaling theory; Management; Strategy; General management; Communication theory; Stock market

References