Journal Article10.1111/J.1540-6261.1985.TB02363.X
Dividends, Dilution, and Taxes: A Signalling Equilibrium
Kose John,Joseph Williams +1 more
TL;DR: In this article, a signalling equilibrium with taxable dividends is identified, where corporate insiders with more valuable private information optimally distribute larger dividends and receive higher prices for their stock whenever the demand for cash by both their firm and its current stockholders exceeds its internal supply of cash.
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Abstract: A signalling equilibrium with taxable dividends is identified. In this equilibrium, corporate insiders with more valuable private information optimally distribute larger dividends and receive higher prices for their stock whenever the demand for cash by both their firm and its current stockholders exceeds its internal supply of cash. In equilibrium, many firms distribute dividends and simultaneously issue new stock, while other firms pay no dividends. Because dividends reveal all private information not conveyed by corporate audits, current stockholders capture in equilibrium all economic rents net of dissipative signalling costs. Both the announcement effect and the relationship between dividends and cum-dividend market values are derived explicitly. DIVIDENDS HAVE LONG PERPLEXED financial economists. Despite recent successes in constructing signalling equilibria with dividends, many important questions remain unanswered.' For example, why do corporations declare dividends and simultaneously sell new stock or, alternatively, distribute dividends and not repurchase stock? How do dividends with their dissipative costsprimarily adverse personal taxes-coexist with other presumably less costly technologies for releasing inside information, like audited annual reports? Do plausible signalling equilibria with dividends require transaction costs incurred by either corporations when issuing or retiring stock or investors when trading outstanding shares? Finally, how do the tax rates and demands for liquidity of such investors as widows, senior citizens, and financial institutions influence signalling equilibria? A satisfactory theory of signalling with dividends must also have empirical content. In particular, such a theory should provide empirically testable propositions detailing the effects of announced dividends on stock prices,2 crosssectional connections between dividends and market values, and any resulting relationships between payout ratios and rates of return on stocks.3 In addition,
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Citations
Dividend announcements: Cash flow signalling vs. free cash flow hypothesis?
TL;DR: In this paper, the authors used Tobin's Q ratios less than unity to designate overinvestors and found that the average return associated with announcements of large dividend changes is significantly larger for firms with Q's less-than-unity than for other firms.
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Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending
TL;DR: It is found that the online friendships of borrowers act as signals of credit quality and increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex post default rates.
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Financial disclosure policy in an entry game
TL;DR: The authors analyzes incentives for voluntary disclosure of proprietory information in a static entry game and shows that a fully revealing disclosure equilibrium exists when the prior of the market is optimistic or the entry cost is relatively low.
954
A Theory of Dividends Based on Tax Clienteles
TL;DR: In a frictionless world without taxes or transaction costs, dividends and share repurchases are equivalent as discussed by the authors, which is consistent with some documented regularities, specifically both the presence and stickiness of dividends, and offers novel empirical implications, e.g., a prediction that it is the tax difference between institutions and retail investors that determines dividend payments, not the absolute tax payments.
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Earnings Information Conveyed by Dividend Initiations and Omissions
Paul M. Healy,Krishna G. Palepu +1 more
- 04 Sep 2015
TL;DR: This article found that firms that initiate dividend payments have positive earnings changes both before and after the dividend policy change, while those omitting dividend payments had negative earnings changes, suggesting that these earnings changes are partially anticipated at the dividend announcement.
References
Dividend Policy, Growth, and the Valuation of Shares
TL;DR: In this paper, the effect of differences in dividend policy on the current price of shares in an ideal economy characterized by perfect capital markets, rational behavior, and perfect certainty is examined.
The Quarterly Journal of Economics
Simon Kuznets
- 13 Aug 2024
Abstract: I. Formulation of the question. A brief historical survey, 381. — II. Recent discussion in Germany: Lederer, Loewe, Carrel, 386. — III. In what sense the equilibrium theory is valid, 392. — IV. The clement of time differences: Rosenstein-Rodan, further elaboration, 401. — V. Time differences and the cumulation of random changes, 408. — VI. Summary, 412.
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The Adjustment of Stock Prices to New Information
TL;DR: In this paper, the authors examine the process by which common stock prices adjust to the information (if any) that is implicit in a stock split and show that the independence of successive price changes is consistent with a market that adjusts rapidly to new information.
The determination of financial structure: the incentive-signalling approach
TL;DR: In this paper, the authors show that if managers possess inside information about the activities of firms, then the choice of a managerial incentive schedule and of a financial structure signals information to the market, and in competitive equilibrium the inferences drawn from the signals will be validated.
Dividend Policy under Asymmetric Information
Merton H. Miller,Kevin Rock +1 more
TL;DR: In this article, the authors extend the standard finance model of the firm's dividend/investment/financing decisions by allowing the managers to know more than outside investors about the true state of the current earnings.