The Effect of Asymmetric Information on Dividend Policy

Abstract

We examine the effect of asymmetric information on dividend policy in light of an alternative explanation based on the pecking order theory. We present evidence that dividends are inversely related to the level of asymmetric information. This finding is consistent with the pecking order theory, but inconsistent with the signaling theory. We provide further support for the pecking order theory by documenting a negative relation between dividends and issue costs that derives from asymmetric information problems. We also find that the previous evidence on the relation between dividends and insider ownership appears to be more strongly related to asymmetric information than to agency costs.