An empirical test of signalling theory
Article publication date: 30 April 2020
Issue publication date: 13 November 2020
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.
The 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.
In 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.
Investors, 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.
This is the first research study that explores the correlation between presidential signalling and market volatility. This study is important for investors and financial managers.
Yasar, B., Martin, T. and Kiessling, T. (2020), "An empirical test of signalling theory", Management Research Review, Vol. 43 No. 11, pp. 1309-1335. https://doi.org/10.1108/MRR-08-2019-0338
Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited