Dividend Policy and Signaling by Insurance Companies

Given their unique characteristics, insurers that adjust their dividends may create a unique signal. An event study methodology is used to measure the share price response of insurers to dividend increases, and matched control samples of banks and industrial firms are similarly assessed. The share price response for insurers is positive and significant. The magnitude of the response for life insurers is smaller than that of other types of insurers or industrial companies but is greater than that of banks. This result may be due to the relatively low level of capital maintained by life insurers. A cross-sectional analysis suggests that the share price responses across insurers are not related to firm-specific characteristics other than firms' main line of insurance business.