51 The duthors also analyze mandgcmenl hving to tool tne marker by Inrnsa.;lnl: dividend4 and rhr ~rnpltralinnso i .II;~ an C'I~L.L~.JCf~oOr ~.L~ t~kholJ~anrds iur the .qu~l~br'atutrgr ~rvllartlsrn Chapter 11 Dividend P o l i c y : Theory and Practice 317 knows more about the true state of the company's earnings than do outside investors.

Accordingly, the price of the stock may react to any unanticipated change in dividends. To the extent dividends provide information on economic earnings not provided by reported accounting earnings and other information, share price will respond. Put another way, dividends speak louder than words under these circurnstances.

The rationale behind a dividend signaling effect is similar to that of a capital structure signaling effect described in Chapter