Working Paper

The relationship between information asymmetry and dividend policy

Abstract: This paper examines how the quality of firm information disclosure affects shareholders' use of dividends to mitigate agency problems. Managerial compensation is linked to firm value. However, because the manager and shareholders are asymmetrically informed, the manager can manipulate the firm's accounting information to increase perceived firm value. Dividends can limit such practices by adding to the cost faced by a manager manipulating earnings. Empirical tests match model predictions. Dividend-paying firms show less evidence of earnings management. Furthermore, nondividend payers changed earnings announcement behavior more than dividend payers following the Sarbanes-Oxley Act, a law that increased financial disclosures.

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2012

Number: 2012-13