Efficient Signalling with Dividends and Investments





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    • Graduate School of Business, University of Wisconsin-Madison, Graduate School of Business, New York University and University of Chicago, and Graduate School of Business, New York University, respectively. We are grateful for helpful comments from M. Brennan, J. Brander, G. Constantinides, T. Copeland, D. Diamond, E. Eckbo, G. Feltham, R. Giammarino, R. Heinkel, R. Jarrow, A. Kalay, M. Miller, R. Morck, M. Rozeff, S. Seth, M. Subrahmanyam, T. Tan, S. Titman, B. Trueman, S. Vishwanathan, and participants in seminars at Alberta, Austin, Buffalo, Chicago, Cornell, Duke, Florida, Harvard, Houston, Illinois, Indiana, Iowa, Maryland, Michigan, North Carolina, NYU, Ohio State, Tennessee, UBC, UCLA, USC, Utah, Wisconsin, and the American and Western Finance Associations. Kose John acknowledges support from a Batterymarch Fellowship and an Entrepreneurial Institute Research Grant at NYU. The first draft of this paper was written while all authors were at NYU.


An efficient signalling equilibrium with dividends and investments or, equivalently, dividends and net new issues of stock is constructed, and its properties are identified. Because corporate insiders can exploit multiple signals, the efficient mix must minimize dissipative costs. In equilibrium, many firms both distribute dividends and deviate from first-best investment. Also, the impact of dividends on stock prices is positive. By contrast, the announcement effect of new stock is negative for firms with private information primarily about assets in place and positive for firms with inside information mainly about opportunities to invest.