Abstract
Using a generalised version of Rees (1997) model, the study empirically determines the extent to which market prices are supported by corporate financial variables (dividend payout, debt levels and investment expenditure) for a set of Indian listed companies (CNX 100) over a 10 year period. The results of the study suggest that earnings distributed as dividends have a greater impact on firm value than do earnings retained within the firm confirming the signalling effect of dividend policy. The study also finds that total debt (financing decision) is a signal of value for the Indian dataset examined. The study, however, fails to provide any support for investment (capital) expenditure decisions in explaining market prices in case of Indian dataset examined. The study further segments the dataset on the basis of average ROE (return on equity) to determine the segments of the sample for which the dividend signalling is stronger. The results reveal that in case of companies exhibiting extreme return on equity (due to significant transitory component in earnings), the value impact of dividends and/or book value is greater than that of retained earnings.
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