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Optimal Money Burning: Theory and Application to Corporate Dividend Policy

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  • B. Douglas Bernheim
  • Lee Redding

Abstract

We explore signaling behavior in settings with a discriminating signal and several costly nondiscriminating ( money burning ) activities. In settings where informed parties have many options for burning money, existing theory provides no basis for selecting one nondiscriminating activity over another. When senders have private information about the costs of these activities, each sender's indifference is resolved, the taxation of a nondiscriminating signal is Pareto improving, and the use of the taxed activity becomes more widespread as the tax rate rises. We apply this analysis to the theory of dividend signaling. The central testable implication of the model is verified empirically.

Suggested Citation

  • B. Douglas Bernheim & Lee Redding, 1996. "Optimal Money Burning: Theory and Application to Corporate Dividend Policy," NBER Working Papers 5682, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5682
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    Cited by:

    1. Mendoza, Ronald U., 2004. "International reserve-holding in the developing world: self insurance in a crisis-prone era?," Emerging Markets Review, Elsevier, vol. 5(1), pages 61-82, March.

    More about this item

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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