Asymmetric Information and Dividend Policy


  • We thank Xia Chen for her help in obtaining the analyst coverage data, Bill Christie (the editor), an anonymous referee, Nalinaksha Bhattacharyya, Laurence Booth, Jason Chen, Qiang Cheng, Ming Dong, Charles Gaa, Ron Giammarino, Rob Heinkel, Harrison Hong, Alan Kraus, Rafael La Porta, Ranjan D'Mello, Hernan Ortiz-Molina, Gordon Phillips, Antoinette Schoar, Carina Sponholtz, John Thornton, seminar participants at Kent State University, University of British Columbia, and participants of the Northern Finance Association Meetings in Vancouver, the FMA European Conference in Stockholm, and the FMA Annual Meetings in Salt Lake City for valuable comments. We gratefully acknowledge the contribution of Thomson Financial for providing analyst data, available through the Institutional Brokers, Estimate System. These data have been provided as part of a broad academic program to encourage earnings expectations research. Li acknowledges the financial support from the Social Sciences and Humanities Research Council of Canada. Li also wishes to thank the MIT Sloan School of Management for its hospitality and support when this paper was initially written. All errors are our own.


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.