Notion that insiders in a firm have information that the market does not have, and that the choice of capital structure by insiders can signal information to outsiders and change the value of the firm. This theory is also called the asymmetric information approach.
Signaling approach (on dividend policy)
Signaling Approach on Dividend Policy
The belief that the amount per share a company pays in dividends is a strong indication of what the management believes about future earnings. For example, if the company pays $5 per share when it had paid $8 per share the previous time dividends were disbursed, shareholders may take this as a signal that the management believes that earnings will soon decline. Some investors may use the signaling approach on dividend policy as a means to determine whether to buy or sell a stock.