Market reaction and fundamental signal in Indonesia


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The random reaction in capital market by different perceptions and other factors makes it difficult for investors to get their optimum return. The objective of this study is to provide an empirical evidence about how the market will react by fundamental signal from the perspective of life cycle theory, free cash flow theory, and bird in the hand theory. The study presents the analysis of covariate for hypotheses testing with 241 firms as the sample which are listed in Indonesia Stock Exchange for period 2010–2015. This study finds that the life cycle theory and free cash flow theory are not absolute theories to explain the market reaction for any firms, because each firm has its own characteristics. The findings show that share prices shall react differently depending on each characteristics of the firm. The bird in the hand theory seems applicable in any case of firms, since the informational contents by dividend can deliver good signal to investors in capital market. Excluding the smaller and younger firms, this study proves that dividend is still a better way in determining the reaction of share prices, since each type of firms has its own types of dividend payers with different share prices.

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    • Table 1. Summary of hypotheses development for testing the relationship of market reaction and fundamental signal
    • Table 2. Sample statistics
    • Table 3. Descriptive statistics
    • Table 4. Analysis of covariate to test the market reaction on fundamental signal