Authors:
Maqdisa Putri Rafie, Grace Siagian, Iskandar Muda, E. Erlina, Mohamad Mokdad

Addresses:
Department of Accounting, Universitas Sumatera Utara, Medan, Sumatera Utara, Indonesia. Department of Public Policies, Zaragoza University, Zaragoza, Aragon, Spain. 

Abstract:

This study examined the appropriateness of Signalling Theory as a framework for explaining differences in firm performance. When information asymmetries are present in the market, and corporate management holds more information about firm value than outside shareholders, good firms must separate themselves from bad ones. This paper investigates the signalling role of some firm-specific corporate decisions, such as the dividend proposal, board composition, and capital structure, vis-à-vis financial performance indicators. Using a sample of 437 unique company cases, researchers employ a quantitative approach to explore the relationship between signal strength and ROI. The results indicate a significant, positive relationship between expensive signals (difficult for inferior firms to imitate) and the firm's value and performance. In particular, the regular payment of dividends and strong governance are leading predictors of financial health. This paper argues that signalling theory remains a useful way to understand how information asymmetries are resolved in modern-day capital markets and the impact this has on firms' ability to expand through access to capital. The research has several implications for corporate managers: the choice of signals can serve as a strategic tool to influence market perceptions and, by extension, performance.

Keywords: Signalling Theory; Information Asymmetry; Corporate Performance; Dividend Policy; Corporate Governance; Long-Run Risk Factors; Weaker Players; Positive Relationship.

Received on: 17/01/2025, Revised on: 14/04/2025, Accepted on: 03/07/2025, Published on: 10/12/2025

DOI: 10.69888/FTSSSL.2025.000523

FMDB Transactions on Sustainable Social Sciences Letters , 2025 Vol. 3 No. 4, Pages: 189-198

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