Article1986

The Information Content of Dividends: A Signalling Approach

74 citations0/0 files storedJournal of Financial and Quantitative Analysis

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

Abstract

The adoption of the incentive-signalling framework gives a reasonably good explanation of the corporate dividend decision. The equilibrium optimal dividend decision under such a framework is presented and analyzed, assuming a reward-penalty managerial incentive scheme is used. It is shown that the size of the declared dividend is an increasing function of expected cash flow. However, there exists a trend that points out that the higher the level of expected cash flow, the lower the marginal effects of cash flow on dividends. A similar relationship is observed with respect to changes in expected cash flows. These conclusions are in harmony with “real world” behavior as reported by several empirical studies. The effects of uncertainty and interest rates on dividends are also analyzed. It is shown, in agreement with observed phenomena, that the higher the uncertainty, the lower the dividend/payout ratio.

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References

1973The Pricing of Options and Corporate Liabilities 1961Dividend Policy, Growth, and the Valuation of Shares 1977The Determination of Financial Structure: The Incentive-Signalling Approach 1977INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION 1956DISTRIBUTION OF INCOMES OF CORPORATIONS AMONG DIVIDENDS, RETAINED EARNINGS AND TAXES 1979Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy 1976The Valuation of Uncertain Income Streams and the Pricing of Options 1959Dividends, Earnings, and Stock Prices

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