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5) Signalling Theory
The signalling theory is developed by Lintner (1956). This theory explicated
that the insiders, including companies’ managers have a better and more accur ate
information about the updates of companies’
performances compared to the outside
investors. In this theory, the distribution of dividend has a purpose of providing
information to investors. The increase in dividend payment indicates a positive signal
for investors that there is an optimistic propect of companies’ cash flow in the future.
On the contrary, if there is decr ease or increase of dividend payment below
normal increase, it is a negative signal for investors, because the there will be a bad
prospect of companies’ cash flow in the future. Essentially, dividend is used as a clue
for investors with incomplete information about company situations to forecast the
future conditions of company.
Some information is contained within the dividend changes, but it is difficult
to estimate whether the increase or decrease in stock prices followed after the increase
or decrease in dividend is only caused by the effect of a signal or a preference for
dividends.
6) Clientelle Effect Theory
This theory stated that a particular group (clientele) of shareholders have
different preferences towards the policy of dividend payment. The group of
shareholders that are shortage in cash prefer to receive high dividend payment, while
the other group of shareholders that do not need cash currently prefer company to
hold its partial net income.
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