TESTING THE SIGNALING THEORY IN QUOTED FIRMS IN NIGERIA
Joel Obayagbona (Ph.D) and Omakomeju Hilda Omokhudu
Volume 8 Issue 1
Abstract
This study tests the signaling theory in quoted firms in Nigeria and to determine the extent to which the theory holds in the country. A sample of 25 non-financial firms listed on the Nigerian Stock Market for a period of 15 years (2006- 2020). The Vector Error Correction Model (VECM) was employed for the analysis of the three models stated in the study. The empirical results showed that the signaling theory does not hold under the cash flow (CFL) model. It was not effective enough in providing the needed positive signals to convince investors about its future prospect given the negative sign of previous LEV results. Under the leverage model, signaling theory does not also hold in Nigeria because the lagged values of cash flow (CFL) were negative and significant while those of dividend payment (DIVP) were positive but failed the 5 percent level of significance. With respect to the investment (INV) model, signaling theory does not hold in quoted firms in Nigeria because the lagged value of cash flow (CFLt-1) and those of dividend payments (DIVPt-1) failed the 5 percent level of significance. The study recommends that, since dividend payment in this study is not an effective tool for signaling, contrary to existing theories, management should therefore understand that in the Nigerian context, more attention should be focus on other factors such as cash flows and leverage which have proven to be better perfect substitutes for signaling theory than dividend payment. Keywords: Signaling Theories, Non-Financial Firms, Dividend Payment Econometric, Statistical Methods
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