Asymmetric Information and Dividend Policy

Abstract

We examine how informational asymmetries affect firms' dividend policies. We find that firms that are more subject to information asymmetry are less likely to pay, initiate, or increase dividends, and disburse smaller amounts. We show that our main results are not driven by our sample, and that our results persist after accounting for the changing composition of payout over the sample period, the increasing importance of institutional shareholdings, and catering incentives. We conclude that there is a negative relation between asymmetric information and dividend policy. Our results do not support the signaling theory of dividends.

Keywords: asymmetric information, dividend initiation, dividend increase, dividend payout, repurchase, information environment

JEL Classification: G35