Article2005

The Effect of Asymmetric Information on Dividend Policy

73 citations0/0 files storedQuarterly journal of business and economics

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

We examine the effect of asymmetric information on dividend policy in light of an alternative explanation based on the pecking order theory. We present evidence that dividends are inversely related to the level of asymmetric information. This finding is consistent with the pecking order theory, but inconsistent with the signaling theory. We provide further support for the pecking order theory by documenting a negative relation between dividends and issue costs that derives from asymmetric information problems. We also find that the previous evidence on the relation between dividends and insider ownership appears to be more strongly related to asymmetric information than to agency costs.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1983Limited-dependent and qualitative variables in econometrics 1984The Capital Structure Puzzle 1961Dividend Policy, Growth, and the Valuation of Shares 1984Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have 1992The investment opportunity set and corporate financing, dividend, and compensation policies 1984Two Agency-Cost Explanations of Dividends 1979On financial contracting

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